Frequently asked questions

Tax investigations encompass everything from forensic business accounting, the technicalities of tax law and procedure, to the personal implications of family disputes. Whatever the individual aspects, the questions that clients ask often revolve around how HMRC operates. Below are a few of these.

What is a tax investigation?

  • HMRC investigates where it considers that there is a risk that the correct amount of tax has not been paid. HMRC uses a combination of automated risk assessment and judgment to select tax investigation cases. Businesses are also profiled by reference to their tax risk scores risk score when compared to others in their sector. Once a risk is flagged, cases are allocated to compliance teams or specialist units. HMRC intervenes, and checks tax returns in a number of ways using a range of approaches. Once a case is selected, HMRC may issue formal notices of enquiry into the tax returns submitted and follows up by requesting additional information and documents. These days, it is also increasingly common for HMRC to make informal information requests, or to issue targeted letters as part of a campaign designed to ‘nudge’ taxpayers into disclosing tax liabilities. Where a tax risk is identified then subject to the facts and circumstances HMRC may also seek to reopen earlier years tax returns and seek to issue ‘discovery assessments’.

    Sometimes, HMRC may seek to audit a business on site, reviewing all records and seeking to review all business taxes ( CT, IT, PAYE, NIC, VAT) at once. HMRC visits are normally agreed in advance of any audit inspection albeit in fraud investigations these may be unannounced.

    For individual taxpayers, the process normally begins by correspondence and focuses on a particular issue such as an asset disposal or a tax claim. These personal tax enquiries are often aligned with the range of information that HMRC holds by which it profiles the individual and compares with the self-assessment tax returns submitted.

  • HMRC interrogates the data it holds to identify and tackle non-compliance using its ‘Connect’ machine learning system which it has developed since 2010. In 2025 HMRC stated that Connect already uses data from over 30 different sources. These include:

    • Tax returns (VAT, PAYE, income tax, corporation tax)

    • Bank accounts and pensions

    • Land Registry (property ownership and transactions)

    • DVLA (vehicle ownership)

    • Social media posts (scrutinised by HMRC in tax fraud and criminal investigation cases)

    • Online marketplaces (eBay, Etsy, Airbnb)

    • Credit reference agency reports

    • Council tax and electoral rolls

    • Information exchanged foreign tax jurisdictions (including through the Common Reporting Standard)

    Given the recent developments in Artificial Intelligence it is anticipated that HMRC will integrate AI to use the data it holds to identify more tax investigation cases.

  • HMRC has extensive information powers. An HMRC officer can issue a notice requiring a taxpayer to provide information or produce documents that the officer 'reasonably requires' for the purposes of checking that taxpayer's 'tax position' or 'collecting a tax debt'. HMRC can also seek information from third parties. For more on whether HMRC’s requests might be challenged, see our recent blog post.

Assessments and penalties

  • How far back HMRC can enquire relates both to the timing of tax returns, and the nature of the case. Whilst normally, HMRC has 12 months from the statutory filing deadline to open an enquiry into a tax return that isn’t the end of the matter. Where HMRC identifies a tax risk they can use their information powers to request information. Whether they can do so, and revisit years which would be outside of the normal ‘enquiry time limit’, depends on the circumstances and the taxpayer ‘behaviour’. Broadly, the standard investigation time limits are as set out below:

    Scenario

    Reasonable care taken - 4 years

    Careless behaviour - 6 years

    Deliberate behaviour or fraud - 20 years

    Offshore income or gains involved - 12 years

    Failure to notify commencement of trade (or register for VAT) - 20 years

    Inheritance Tax (IHT) fraud - No time limit

  • HMRC normally charges penalties as a percentage of the tax not paid at the correct time. There are penalty rules for late filing and late payment, as well as penalties for failure to notify. When a submitted tax return is investigated and additional taxes are found to be due, the normal range of penalties is broadly as follows:

    Behaviour

    Reasonable care - 0%–30% of tax shortfall

    Careless behaviour - 15%–30% of tax shortfall

    Deliberate but unprompted - 20%–70% of tax shortfall

    Deliberate and concealed - 30%–100% of tax shortfall

    There are also special rules around penalties which relate to either failure to notify, or to offshore tax matters.

    Penalties can be mitigated by HMRC depending on both the nature of the offence and the cooperation and disclosure volunteered during the investigation. It is important to manage this so as to obtain the maximum penalty mitigation.

    HMRC also charge late payment interest and at present this is charged at a punitive 4% above UK base rate. In any tax investigation it is key to judge the years potentially involved, and the tax, penalty and interest considerations so as assess the overall financial risk.

  • Clients are often understandably concerned of the risk of having to litigate. Where HMRC has reached a formal decision and issued an assessment or penalty notice it can be difficult to reverse this without going to the Tax Tribunal with the additional costs and uncertainty this brings. This is one of the reasons it is vital that tax investigations and enquiries are well managed from the outset. The aim should always be to negotiate agreement with HMRC wherever possible without having to litigate. Good communication allied with a proactive approach to tax also makes for better long-term relationships between any business and HMRC.

    Sometimes however, despite all efforts, agreement proves impossible. Then it is vital to work in a timely fashion with a client and any legal team to anticipate litigation whilst negotiating with HMRC in case agreement might still be reached. The initial response to an adverse HMRC decision may be to request an internal HMRC review by another officer. This must be done within 30 days of a decision notice being issued. It may also be appropriate to consider an Alternative Dispute Resolution approach. If it is considered that an appeal to the Tax Tribunal is appropriate, then this must normally be done within 30 days from the date of the HMRC decision or assessment. Timing is key, as missing either review or appeal deadlines can affect rights to challenge HMRC decisions.

Managing HMRC tax investigations

  • HMRC has changed its approach following the decentralisation of much of its work across the UK. The restructuring of HMRC allied with the move to digital means that in person local tax office meetings of former times are largely of the past. While the means of communication with HMRC have changed, well-judged communication remains key to successful outcomes in tax investigations. Communication with HMRC is often by a tax adviser on behalf of a client via email, calls, Teams or in person meeting. Often though, to make real progress in a complex case, or simply just to establish trust with HMRC, the question of whether a client should meet with HMRC needs to be considered. 

    It is seldom a good idea to meet with HMRC without an adviser being present and an experienced tax adviser should always be present and able to avert any misunderstandings. In some cases, for example, where tax fraud is being investigated, a taxpayer may have little choice about whether to meet with HMRC- it will be mandatory and in such cases a tax investigation specialist should always be involved - Read more →. In more mainstream cases the best approach depends on the facts and circumstances. A well prepared for meeting combined with proactive engagement with HMRC can be efficient and help reach certainty. In some situations, it can be important to insist on clarity from HMRC beforehand and explore whether correspondence would not be a better approach. If there is doubt over the questions that HMRC might ask, should a client even be in the room?

  • When a previously undisclosed tax liability is identified early voluntary disclosure of it can bring certainty, help manage any investigation, and minimise the penalty risk. Large businesses and HNW individuals may already have an appointed HMRC officer, but for most taxpayers, the question is how best to contact HMRC and what approach should be taken. Judging how to commence a disclosure to HMRC can determine the outcomes- good preparation is essential.

    These days, much disclosure work is conducted through HMRC’s Digital Disclosure Service online platform. For simple errors this can provide a framework to settle straightforward tax liabilities. HMRC also announces periodic initiatives, encouraging issue or sector wide disclosures. In recent years these have targeted, Let Property, the R&D sector, Electronic Till misuse, and Crypto assets. Whilst these initiatives do not normally offer any element of amnesty, they can provided standardised routes to sector wide settlement terms.

    Where deliberate tax misstatements are involved, or where there has been a significant failure to notify covering many years, it is important to consider whether the disclosure might result in a criminal investigation. In such cases use of the Contractual Disclosure Facility (COP 9) should always be considered. In this process, a taxpayer may enter into a contract with HMRC, commit to full cooperation, accurate disclosure and payment in return for HMRC agreeing not to seek any criminal prosecution for what is disclosed. Such cases can be instigated either by an HMRC investigation or by a taxpayer seeking specialist advice before voluntarily making a disclosure to HMRC to secure protection against criminal prosecution.

  • Whilst HMRC enquiries that focus only on one aspect can often be settled by correspondence within a few months, it is not uncommon for in depth tax investigations to last over a year. The time taken can hinge both on the complexity, the amount of information requested by HMRC, and whether the correspondence involves multiple rounds of questions. In cases involving a disclosure, a reporting framework may be agreed with HMRC and after the submission of the agreed reporting this will be reviewed and discussed. If HMRC issues formal information notices this can also add to the resources required on all sides and impact on the time needed.

    In most cases, agreement can be negotiated, and the case concluded either by overall agreement and contractual settlement covering all issues, or agreements on the adjustments needed to the submitted tax returns. If however, there are appeals, or the possibility of taking a disputed matter to the tax tribunal, the delays can be extensive.

    Where a taxpayer considers that everything possible has been supplied, and that HMRC should bring the matter to a conclusion, it is worth considering applying for a formal closure notice - Read More →.