If a brown envelope from HMRC lands on your desk, it is rarely welcome – but it does not have to derail your business. Understanding how to prepare for HMRC investigations before one ever starts will save you stress, time and money. HMRC’s compliance activity is active and data‑driven. In 2023/24 the department completed 320,000 compliance checks, up 15% on the previous year (HMRC, 2024). That rise alone is a clear signal that every business should assume it could be selected for review and make sure its systems, records and advisers are ready.
In this blog, we explain why HMRC might open an enquiry, what typically triggers it, how the process unfolds, the time limits HMRC works to, and how to prepare for HMRC investigations in a practical, methodical way. We also flag common pitfalls we see – late or incomplete responses, weak working papers, unmanaged adviser privilege – and how a proactive accountant can steady the ship from day one. Our aim is simple: give you a clear plan so you can keep running the business while we handle the tax conversation.
Why HMRC may investigate you
HMRC enquiries are not always about suspected wrongdoing. Sometimes they are random; sometimes they are risk‑based, driven by data mismatches between your return and the information HMRC already holds (for example, from banks, Land Registry or overseas tax authorities). Sector benchmarks, rapid swings in profits, repeated late filings, and involvement in higher‑risk areas such as R&D tax reliefs or employment status can also put you on the radar. For larger or cross‑border groups, transfer pricing and diverted profits remain regular themes.
Common triggers to watch for
- Inconsistent filings: Differences between VAT returns, corporation tax returns and statutory accounts.
- Large one‑off items: Unusually high director’s loans, gains, write‑offs or provisions.
- R&D or creative relief claims: Poorly evidenced claims can be challenged.
- PAYE/IR35 issues: Off‑payroll working assessments, benefit‑in‑kind reporting gaps.
- Cryptoassets and property disposals: HMRC has better data than many assume, so missing or late capital gains figures often prompt questions.
Being aware of these triggers – and documenting your positions at the time you file – is one of the most effective ways to prepare for HMRC investigations.
What the HMRC investigation process looks like
Most enquiries start with a letter setting out the return, period and issues under review, and asking for records and explanations. HMRC will usually suggest a response deadline – often 30 days – though this can be negotiated if the scope is wide or key staff are unavailable (HMRC Enquiry Manual EM1580). Provide a full, accurate package on time, and you immediately lower the temperature of the enquiry.
If HMRC identifies errors, it will assess additional tax, interest and – depending on behaviour – penalties. You can challenge HMRC’s view, ask for an internal review, or appeal to the Tribunal. Throughout, well‑kept records and contemporaneous working papers are your best defence.
How to prepare for HMRC investigations (and sleep better at night)
- Tighten record‑keeping: Keep digital, searchable, and well‑indexed records for every tax you pay. Map each figure in the return to supporting schedules.
- Document judgements: For any grey area (for example, employment status, transfer pricing, R&D eligibility), keep a short file note explaining your reasoning and the evidence you relied on.
- Diary statutory deadlines: Late filing and payment are red flags. Set internal reminders and allocate responsibility.
- Run a pre‑emptive risk review: Perform a “mock enquiry” on your last return. look for inconsistencies, missing evidence and positions HMRC often challenges.
- Know your response plan: Nominate a single point of contact, route HMRC letters straight to your adviser, and agree who will draft, check and sign responses.
- Protect privilege correctly: Legal professional privilege does not automatically extend to all accountant communications. Understand what is protected and structure advice accordingly.
- Train your finance team: Short, focused sessions on VAT evidence, travel and subsistence rules, benefits in kind and director’s loan accounts reduce avoidable errors.
Record‑keeping and systems that help
Cloud accounting, digital document management, and well‑built working paper templates make it far easier to evidence positions quickly. Reconciliations between VAT returns, payroll submissions and corporation tax computations should be standard. Version control matters too – HMRC will want to see how a final figure evolved. Investing modest time now in clean, well‑labelled folders and clear audit trails is one of the cheapest ways to prepare for HMRC investigations.
Time limits, penalties and your rights
HMRC generally has 4 years to raise assessments where you took reasonable care, 6 years where behaviour was careless, and up to 20 years for deliberate behaviour. There are separate (and in some cases 12‑year) limits for offshore matters. Understanding where your case sits on this spectrum is key to managing penalty exposure (HMRC Compliance Handbook CH51300 and CH53400).
You have rights: to be treated professionally, to appeal certain information notices, to request an internal review, and to take your case to the Tribunal. But you also have obligations to keep adequate records and to respond within reasonable timeframes. A measured, cooperative approach – without volunteering irrelevant material – generally produces the best outcomes.
How we can help you prepare
Preparation changes the dynamic: instead of reacting under pressure, you control the timetable, the scope of information you share, and the tone of the conversation with HMRC. We help clients put that framework in place early – from risk‑rating recent returns to building tidy working papers that stand up to enquiry. If a letter does arrive, we triage it quickly, agree a clear strategy with you, handle all correspondence, and keep you informed without dragging you into the detail.
Our role is practical as well as technical. We will negotiate realistic deadlines, push back where HMRC requests material it is not entitled to, and present your position with the right level of evidence. Where errors are identified, we work to reduce penalties by demonstrating reasonable care or unprompted disclosure. Just as importantly, we help you fix the root cause so the same point does not reappear next year.
If you want specific, tailored advice on how to prepare for HMRC investigations, speak to us. Ask about a confidential pre‑enquiry risk review, let us stress‑test your record‑keeping, or hand us the brown envelope you have just received. Contact us to get started – the earlier we’re involved, the faster you can get back to running your business.