How to handle tax investigations: Tips for businesses

If you run a limited company or you’re an owner-managed business, HMRC inquiries can feel disruptive and time-consuming. The good news is that most tax investigations are routine checks, and there’s a lot you can do to minimise risk and keep things moving. This guide explains what typically triggers tax investigations, what HMRC can ask for, how to respond, and where penalties and interest can arise. We’ve also included a simple action plan for the first 72 hours, plus what to expect afterwards. Our aim is to help you protect cashflow, reduce stress and keep your focus on running the business.

HMRC continues to invest in compliance and data-matching tools, so the odds of contact are higher than many business owners realise. The tax gap – the difference between tax theoretically due and tax actually collected – was estimated at 5.3% (£46.8bn) for 2023/24 (HMRC, 2025). The government has also announced additional resources, including 5,500 new compliance staff over the next five years, in a package certified by the Office for Budget Responsibility (OBR) (HMRC, 2025). Meanwhile, HMRC completed around 320,000 compliance checks in 2023/24, up 15% on the previous year (HMRC, 2024). None of this means your business has done anything wrong – but it does underline why preparation matters.

Why HMRC opens enquiries

HMRC selects cases in several ways. Some are random. Many are risk-based – for example, when your numbers differ markedly from sector norms, when claims appear inconsistent with past returns, or when HMRC data doesn’t match your filings. Other inquiries follow from specific transactions or disclosures.

Common triggers include: unusual variances year-on-year, high cash takings, large director’s loan movements, repeated late filings, significant research and development (R&D), capital allowances or VAT repayment claims, and payroll anomalies. You can’t eliminate all risk, but you can present clear, well-evidenced returns and keep tidy digital records.

Prepare for tax investigations – the first 72 hours

If an HMRC letter lands, act quickly and calmly. Here’s a practical checklist.

• Read the scope: Identify the period, the taxes involved and whether it’s a full inquiry or focused on specific points.
• Notify your adviser: Send us a copy immediately so we can manage deadlines and communications.
• Ring-fence records: Gather bank statements, sales and purchase ledgers, payroll records, contracts and invoices for the period.
• Check claims: Pull the working papers for any reliefs or allowances referenced, so we can evidence the figures.
• Keep communications centralised: All correspondence and calls should go through us – it keeps the narrative consistent and avoids accidental over-disclosure.

What HMRC can request – and your rights

HMRC can ask for records that are reasonably required to check a tax position. For most claims, they have a 12-month inquiry window from the day your return was received to open an inquiry. If a return is filed late, the window runs to the quarter day after the first anniversary of receipt (HMRC, 2025). Beyond that, HMRC may use “discovery” powers where there is loss of tax – normally up to four years, six years for careless errors, and 20 years for deliberate behaviour (HMRC, 2016).

You have the right to professional representation, to reasonable time to respond and to appeal certain decisions. In many cases we’ll agree a timetable with HMRC and handle the correspondence for you.

Building a strong response

A well-structured response can shorten an inquiry and reduce penalties. We focus on the following.

• Records: Provide clean schedules that reconcile to the accounts and returns.
• Narrative: Give short, factual explanations for variances and one-off items.
• Evidence: Include invoices, contracts, bank evidence and calculations that support the position.
• Consistency: Ensure figures tie across corporation tax, VAT and PAYE where relevant.
• Cooperation: Respond on time, answer what’s asked and avoid speculation.

Where HMRC identifies errors, early and complete disclosure – and a clear plan to fix controls – typically leads to lower penalties.

Penalties, interest and time limits

Penalty ranges depend on behaviour and whether disclosure is prompted or unprompted. As a guide, careless errors generally attract 0%–30%, deliberate 20%–70%, and deliberate and concealed 30%–100% of the extra tax due. Quality of disclosure matters – telling, helping and giving access can reduce penalties within the relevant range.

HMRC charges late-payment interest from the original due date. For 2025/26, late payment interest is set at Bank of England base rate plus 4% and repayment interest at base rate minus 1% (subject to a minimum floor). Interest isn’t a penalty – it compensates for late payment – but it can add up, so settling agreed liabilities promptly is important.

Keep the time limits in mind. In general, discovery assessments are four years for general cases, six years for careless errors and 20 years for deliberate behaviour. If HMRC is out of time, we’ll challenge the assessment.

When to settle and when to appeal

Not every point is worth fighting. We’ll weigh up the following.

• Technical strength: How strong is the legal position and evidence.
• Quantum: The tax at stake versus the costs of prolonging the case.
• Behavioural impact: How penalty ranges shift if disclosure is delayed.
• Cashflow: Whether a time-to-pay arrangement will reduce pressure.

If the law and facts are with you, we’ll push back. If a compromise is sensible, we’ll negotiate a fair settlement, seek penalty mitigation and agree a manageable payment plan.

Reducing the risk next year

Prevention is always cheaper than cure. Practical steps include:

• quarterly reviews – short health checks to catch issues early
• year-end packs – consistent schedules that support key balances and claims
• evidence logs – contemporaneous notes for judgments like R&D, capital allowances and revenue recognition
• VAT walk-throughs – reconcile VAT returns to control accounts and review partial exemption
• payroll controls – director benefits, P11D processes and off-payroll assessments documented
• board minutes – decisions on dividends, loan write-offs and provisions recorded.

We can agree a simple compliance calendar and assign responsibilities so there are fewer surprises.

Taking control when HMRC gets in touch

HMRC tax investigations don’t have to derail your week. With early action, clear records and consistent messaging, most inquiries are resolved without lasting impact. The safest route is to assume HMRC will ask you to evidence key numbers – then make sure your files can do that job. If a letter arrives, send it to us the same day, and we’ll take it from there. We’ll help you scope the issues, coordinate the response and decide whether to settle or appeal, always with an eye on cashflow and time.

If you’d like a pre-emptive review or you’ve just received an HMRC notice, we’re here to help. Arrange a quick call and we’ll map out the next steps for your business. Mention this article and we’ll include a short risk review tailored to your sector. For steady hands and straight answers on tax investigations, get in touch today.