HMRC Investigations: A Survival Guide for Small Businesses

For a small business owner, an HMRC investigation is among the most stressful professional events possible. The uncertainty over what HMRC knows, the months of correspondence, the prospect of large bills, and the sense that the agency holds all the cards — all of it weighs heavily. This guide draws on our experience handling more than 200 investigations in the last decade. We cannot remove the stress, but we can demystify the process.

The three faces of HMRC enquiry work

Not every "investigation" is the same. In practice, the work HMRC opens with you will fall into one of three broad categories:

1. Compliance check: most common. Triggered by a specific risk indicator on a return. Usually limited in scope and resolved in months.
2. Full enquiry: HMRC opens a complete review of a return under Section 9A TMA 1970 (for Self Assessment) or Schedule 18 FA 1998 (for Corporation Tax). Can take 12 to 24 months.
3. Civil fraud investigation: Code of Practice 9 (COP9), under the Contractual Disclosure Facility. Suspected serious tax fraud, with criminal prosecution avoided in exchange for full disclosure.

Criminal investigation is reserved for the most serious cases and runs in parallel with the criminal justice system, not the civil tax framework.

The opening letter

HMRC's opening letter sets the scope. Read it carefully and identify:

• Which return and which tax year is under enquiry?
• Which specific items has HMRC asked about?
• What is the response deadline (usually 30 days from the date of the letter)?
• Has HMRC referred to specific powers (e.g. Schedule 36 FA 2008 information notice)?

The scope dictates your response strategy. A narrow aspect enquiry on, say, the level of motoring expenses is dealt with very differently to a full enquiry that touches every figure on the return.

Your rights and obligations

Under HMRC's information powers, you must produce documents and information that are "reasonably required" to check your tax position. You do not have to:

• Produce documents that are subject to legal professional privilege.
• Attend in-person meetings (most enquiries can be conducted in writing).
• Answer questions outside the scope of the formal enquiry.
• Provide information about other taxpayers (e.g. customers).

You do have the right to:

• Be represented by an accountant or tax adviser at every stage.
• Request that questions be put in writing.
• Refuse a meeting unless HMRC issues a formal notice (and even then, the meeting can be conducted under specific conditions).
• Appeal information notices to the First-tier Tribunal.
• Apply for an alternative dispute resolution mediation if you reach an impasse.

The seven mistakes that cost the most

1. Engaging without representation. The language of HMRC correspondence has specific technical meaning. "Reasonable", "deliberate", "concealed" are not casual terms.
2. Producing raw bank statements without classification. Always reconcile and classify before producing.
3. Answering verbally in meetings without a written record. Always insist on questions in writing and your responses being noted.
4. Volunteering information outside the scope. A property landlord under enquiry on rental income should not start discussing crypto trades.
5. Missing response deadlines. Penalties for failure to comply with an information notice start at £300 and escalate by £60 per day.
6. Negotiating settlement before scope is clear. HMRC will sometimes propose a "let's wrap this up" figure early. Without knowing the full scope, you may overpay.
7. Failing to maintain mental health. Investigations are exhausting. Get support, take breaks, and remember that the agency is a counterparty, not an adversary in the personal sense.

The penalty calculation

Penalties are calculated as a percentage of "potential lost revenue" (PLR) — the tax that would have been lost had HMRC not opened the enquiry. The percentage is determined by behaviour and disclosure quality:

• Reasonable care taken: no penalty.
• Careless, unprompted: 0% to 30% (max mitigation reduces to 0%).
• Careless, prompted: 15% to 30%.
• Deliberate, unprompted: 20% to 70%.
• Deliberate, prompted: 35% to 70%.
• Deliberate and concealed, unprompted: 30% to 100%.
• Deliberate and concealed, prompted: 50% to 100%.

Within each band, three behavioural factors determine the final percentage: telling, helping, and giving access. Maximum cooperation can reduce penalties dramatically — often halving them or more.

Settling the enquiry

Most enquiries end with a "contract settlement" — a written agreement between you and HMRC quantifying tax, interest and penalties. The settlement may also include adjustments to multiple years if HMRC has "discovered" issues affecting earlier or later periods. Key considerations:

• Settlement is final for the years and issues covered, but does not preclude HMRC opening enquiries into other areas.
• Time to Pay arrangements are normal for settlements over £30,000. HMRC will look at affordability based on your wider financial position.
• Closure notices can be issued instead of a contract settlement if you prefer the tribunal route.

Tax investigation insurance

Most accountancy firms offer tax investigation insurance (sometimes called "fee protection"). For a fixed annual premium, the insurer covers the cost of professional fees during an enquiry. Given that even a modest enquiry can run to £5,000 or more in fees, the cover almost always pays for itself the first time you need it. PushDigits provides this as part of standard business advisory engagements.

What to do today, even if you are not under enquiry

1. Confirm your records meet the six-year retention requirement.
2. Reconcile turnover sources monthly.
3. Maintain a contemporaneous expense ledger with scanned receipts.
4. Document any unusual transactions (large director loans, related-party dealings, one-off transactions) with a written rationale.
5. Consider an "investigation readiness" review.

If you are already under enquiry, the most important action is to engage specialist support today. Book an urgent call and bring a copy of the HMRC letter. For preventative work, our tax planning and business advisory services include enquiry-readiness reviews. Detailed enquiries via the contact page.