Few three-word phrases can tighten a business-owner’s shoulders faster than “HMRC wants answers”. Whether you run a busy dental clinic, plate up brunches for eager foodies, or keep Britain’s building sites humming, the words tax investigations land the same punch. They stop the diary, raise the blood pressure and threaten cashflow at precisely the wrong moment.
The good news? Most checks are routine, most last weeks not months, and most end with a polite letter confirming no further tax is due. Still, the process can feel opaque if you have never been through it. In 2023/24 HMRC completed 320,000 compliance checks – a 15% jump on the previous year (HMRC, 2024). That rising activity means every UK business should know what an inquiry looks like, where the red lines sit, and which records you need to keep stress – and penalties – to a minimum. This guide lifts the lid on tax investigations, sets out your rights and shares the practical steps we recommend to clients in construction, hospitality and facial aesthetics.
Common triggers for tax investigations
HMRC does not spin a roulette wheel. It uses data-matching software, cross-checks with banks and tips from the public to decide whom to write to. Frequent triggers include the following.
- Unusual profit swings: A sudden drop in taxable profit without an obvious reason.
- Sector-specific risks: Cash-heavy hospitality takings or Construction Industry Scheme (CIS) mismatches.
- Late or inconsistent returns: Especially VAT and PAYE.
- Lifestyle gap: A director’s visible spending that outstrips reported income.
- Random selection: A small slice of cases is still picked at random to keep everyone on their toes.
If the first letter is a “nudge” asking you to double-check a figure, handle it quickly. The longer you wait, the higher the chance HMRC escalates to a full inquiry.
The investigation timeline: From nudge letter to closure
- Opening letter – sets out the tax periods and taxes under review and requests documents. You normally have 30 days to respond.
- Information exchange – HMRC may ask follow-up questions or arrange a meeting. Take an adviser to every meeting; it keeps the chat focused and everything on the record.
- Agreement or contention – if HMRC accepts your explanations, the case closes. If it believes extra tax is due, it issues a calculation (the “decision”).
- Penalties and interest – careless errors attract up to 30% of the extra tax; deliberate but not concealed mistakes rise to 70% (HMRC guidance). Late-paid tax currently accrues interest at 8.25% per annum (HMRC interest rates).
- Appeal or payment – you have 30 days to appeal. A review by an independent HMRC officer often settles matters without tribunal.
Your rights and HMRC’s powers
HMRC can: request records, visit premises (with notice) and ask third parties for information.
It cannot: turn up without ID, demand documents unrelated to the taxes under inquiry or force you to attend an interview without reasonable notice.
You can: request clarification, record meetings and use professional representation.
You should: keep digital records for at least six years and respond in writing to every query so there is an audit trail.
Mitigating disruption and protecting cashflow
Construction firms tell us that an inquiry in peak summer can derail site schedules. Restaurants fear the effect on supplier credit. Dentists and clinics worry about patient confidence. Our playbook contains four essentials.
- Pre-emptive file health-check: Quarterly reviews – compare sales, costs and bank receipts; flag oddities before HMRC spots them.
- Robust digital bookkeeping: Cloud software that tracks invoices, payroll and CIS statements cuts response time to minutes, not days.
- Time-to-pay readiness: If extra tax is likely, draft a realistic cashflow forecast. HMRC will usually accept staged payments if you propose a plan first.
- Communication protocol: Nominate one person (usually us) to deal with HMRC. It prevents crossed wires and off-the-cuff replies that create fresh questions.
How we help – sector savvy support
We cut our teeth on CIS reconciliations, tronc schemes, whitening kit sales and every other quirk our specialist niches throw at us. Add accredited tax investigation cover and you get:
- a named partner on speed-dial – you speak to a human who knows your business
- fixed-fee defence – no surprise bills while you fight surprise bills
- insurance that pays our fees if HMRC opens an inquiry, keeping your budget intact.
Clients who bought cover last year saved an average of £2,400 in professional costs. They also slept better.
Ready for calm through the storm?
Tax investigations rarely pick a convenient time. They arrive between payroll runs, just as the concrete pour is booked or when you have a diary full of cosmetic treatments. That is why preparation matters more than bravado. Treat the inquiry like any other business project: assemble the facts, set deadlines, assign roles and track progress. If HMRC’s questions highlight genuine errors, own them early. The revenue’s penalty regime rewards honesty – a swift confession can slice the potential charge by half, sometimes more.
Remember, too, that an investigation, though stressful, often exposes helpful insight. Discrepancies in wage records may reveal overpayments. A deep dive into stock might uncover shrinkage you suspected but could not prove. Use the exercise to tighten controls and, where possible, claw back cash.
Above all, do not let pride keep you from ringing us on day one. We deal with HMRC daily, speak the same procedural language and know when a request oversteps the mark. While you focus on pouring foundations, plating desserts or perfecting smiles, we will field the calls, draft the replies and negotiate realistic time-to-pay schedules that protect cashflow.
Think HMRC might knock soon, or already have? Let’s talk. We will guide you through the tax investigations process, get the brown envelope off your desk and free you to grow the business. Call us or use the contact form on our site today.
