What Triggers an HMRC Compliance Check - Norwich Accountancy (2024)

17 November 2023

For the tax affairs of individuals and businesses in the UK, the HM Revenue and Customs (HMRC) is the governing authority that makes sure you’re toeing the line when it comes to tax laws. To maintain the integrity of the system, HMRC conducts compliance checks, also known as tax investigations. These can be daunting for anyone who finds themselves on the receiving end. Understanding what can trigger an HMRC compliance check is crucial for any taxpayer.

Common Triggers for HMRC Compliance Checks

• Discrepancies in Tax Returns: The most common trigger is a discrepancy or anomaly in the tax return compared to previous years or similar businesses. This could include significant changes in income and expenses or making a large claim for a VAT refund when turnover is low. HMRC uses a sophisticated system to analyse returns, highlighting any that fall outside the norms for further inspection.
• Late Filings and Payments: Consistently late filings or tax payments can raise red flags. This suggests to HMRC that there may be deeper issues with your financial management or a potential for incomplete or inaccurate reporting.
• Informant Tips: Yes, HMRC receives tips, sometimes from disgruntled employees or competitors. If someone informs HMRC that a business or individual isn’t complying with tax laws, it may initiate a check.
• Random Selection: Sometimes, there’s no specific reason; HMRC randomly selects tax profiles for investigation. It’s their way of keeping everyone on their toes and ensuring taxpayers maintain accurate records.
• Sector-Specific Checks: HMRC periodically targets specific sectors where they believe tax avoidance or evasion is widespread. If your business operates within one of these sectors, your chances of a compliance check might increase during these campaigns.
• Business Performance Inconsistencies: If your business shows markedly different performance metrics compared to others in your industry, HMRC might investigate to understand why. This doesn’t just apply to underperformance – unusually high success can also trigger a check.
• International Transactions: With global transactions under increasing scrutiny, those who conduct a high volume of international business might find themselves subject to checks, especially if there are transactions from jurisdictions considered high-risk for tax evasion.

The Process of a Compliance Check

• Initial Contact: A compliance check typically starts with HMRC notifying you, either through a letter or phone call. They will inform you of the check and what they need from you.
• Gathering Information: HMRC will request specific documents, which could include personal or business bank statements, receipts, invoices, and accounting records. They may also want to look at your tax calculations and self-assessment returns in detail.
• Meeting and Interviews: Sometimes, HMRC will ask to meet you or your accountant, or they may want to interview you to gather more information.
• Outcome: Once HMRC has reviewed the necessary documentation and information, they will communicate their findings. If they find everything in order, they will close the investigation. If not, they may request additional payment of unpaid taxes, apply penalties, or, in severe cases, pursue criminal prosecution. In general, the more help you give, the lower the penalty will be.

How to Reduce the Risk of a Compliance Check

• Accurate and Timely Filing: Ensure all tax returns are accurate and filed on time. Use professional accountancy services if you’re unsure about your ability to do this correctly.
• Consistent Records: Maintain consistent and detailed financial records. This can make a compliance check much smoother and quicker.
• Seek Professional Advice: If you’re in doubt about your tax affairs, it’s wise to seek advice from a qualified accountant or tax advisor. They can help you avoid pitfalls that might lead to a compliance check.
• Disclose All Income: Declare all sources of income, including those from overseas. Full disclosure is always your safest bet.
• Understand the Rules: Have a good understanding of the tax rules applicable to your business. If HMRC updates tax laws or guidance, make sure you’re following the new rules.
• Report Changes: If there are legitimate reasons for changes in your income or business performance, report these proactively in your tax return.

Navigating Compliance Checks with Confidence

An HMRC compliance check can be a stressful experience, but understanding what can trigger an investigation is your first line of defence. Remember, most checks are initiated by anomalies or suspicions of incorrect tax reporting. By maintaining good records, submitting accurate and timely returns, and seeking professional guidance when necessary, you can minimise the chances of an HMRC compliance check disrupting your business or personal finances. If you need help keeping your records in order, don’t hesitate to reach out and speak to one of our tax return specialists. Our motto is ‘Tax Returns: Stress Deducted’ because we’re here to help keep your taxes on track, headache-free and hassle-free.