What Really Happens During a HMRC Tax Investigation: Bedford Accountants Explain

Introduction

At Towerstone, we provide accountancy services in Bedford to local sole traders, landlords, and limited companies. We have written an article about What Really Happens During a HMRC Tax Investigation: Bedford Accountants Explain to help you understand how investigations usually start, what HMRC looks for, and how good preparation reduces disruption.

Few things worry individuals and business owners more than receiving a letter from HMRC that hints at a tax investigation. From experience I can say that the fear is often worse than the reality but only if you understand what is actually happening and how to respond. Too many people imagine dawn raids and accusations of fraud when in most cases an investigation is a structured review triggered by inconsistencies or risk markers rather than suspicion of wrongdoing.

In this article I explain in plain English what really happens during a HMRC tax investigation. I will walk through how investigations start what HMRC is looking for how the process unfolds and what your rights and responsibilities are. I will also explain how Bedford accountants typically support clients during investigations and what practical steps you can take to reduce stress risk and potential cost. This is written from real world experience and aimed at helping you feel informed rather than alarmed.

What Is a HMRC Tax Investigation?

A HMRC tax investigation is a formal review of your tax affairs to check that the information you have submitted is correct and complete. HMRC uses the term compliance check rather than investigation in many cases and that language is important. Most checks are not accusations of fraud. They are requests for clarification evidence or correction.

HMRC has a legal duty to ensure the correct amount of tax is paid. To do this they review returns from individuals sole traders partnerships landlords and companies. Investigations can relate to income tax corporation tax VAT PAYE or capital gains tax.

From my experience the majority of investigations arise because something does not match HMRC’s data rather than because someone has done something deliberately wrong.

Why HMRC Opens an Investigation

Understanding why investigations start helps remove some of the fear. HMRC does not randomly pick names out of a hat. They use risk based systems that compare information from multiple sources.

Common triggers include:

• Inconsistencies between tax returns and third party data such as banks employers or property transactions

• Sudden changes in income or expenses that do not follow previous patterns

• Repeated losses reported by a business

• High expense claims relative to turnover

• Late or amended returns

• Industry benchmarks that suggest figures are outside expected ranges

For example if a self employed person reports very low profits year after year while continuing to trade HMRC may want to understand how the business is viable. That does not mean wrongdoing. It means HMRC wants reassurance.

Types of HMRC Investigations

Not all investigations are the same. The scope and intensity depend on what HMRC is checking.

Aspect Enquiries

An aspect enquiry focuses on a specific part of a return. HMRC might ask about one expense category a particular source of income or a relief claim. These are common and usually limited in scope.

From experience these are often resolved quickly if records are clear and explanations are straightforward.

Full Enquiries

A full enquiry looks at the entire tax return and sometimes multiple years. HMRC will review income expenses bank statements and supporting documents.

These take longer and require more involvement but again they are not automatically accusations of fraud.

VAT Inspections

VAT inspections are common and often routine. HMRC checks that VAT returns are accurate and that the correct scheme and rates are being used.

Many VAT inspections are scheduled visits or desk based reviews rather than investigations triggered by suspicion.

PAYE Reviews

PAYE reviews focus on payroll compliance including tax codes benefits expenses and director pay. These often arise when HMRC data does not align with RTI submissions.

How a HMRC Investigation Starts

In almost all cases the process begins with a letter. HMRC will write to you explaining that they are checking your tax position and what information they need.

The letter will usually include:

• The tax year or periods under review

• The type of tax being checked

• The reason for the check in broad terms

• A request for documents or explanations

• A deadline for response

From experience the tone of the letter is formal but not accusatory. The biggest mistake people make at this stage is panic or ignoring the letter.

Ignoring HMRC correspondence almost always makes matters worse.

What HMRC Is Looking For

HMRC’s goal is to establish whether the correct tax has been paid. They are looking for errors omissions or misunderstandings.

They are not there to judge lifestyle or business decisions. They are interested in numbers evidence and compliance with rules.

Typical areas HMRC focuses on include:

• Undeclared income

• Incorrect expense claims

• Personal expenses claimed through a business

• Incorrect VAT treatment

• Timing differences

• Misapplied reliefs

• Director loan account issues

From experience many issues arise from lack of understanding rather than intent. HMRC recognises this and the law distinguishes between innocent error carelessness and deliberate behaviour.

Your Rights During a HMRC Investigation

This is an area many people do not realise. You have rights as well as responsibilities.

You have the right to:

• Understand why HMRC is checking your tax

• Know what information is being requested

• Ask for reasonable time to respond

• Be represented by an accountant or tax adviser

• Challenge HMRC assumptions if they are incorrect

• Appeal decisions you disagree with

You are not required to volunteer information beyond what is reasonably requested. You should answer honestly but carefully.

From experience having professional representation changes the dynamic. HMRC communicates with your adviser who understands what is relevant and how to respond.

Your Responsibilities

Alongside rights come responsibilities.

You are required to:

• Keep adequate records

• Provide requested information within deadlines

• Cooperate with reasonable requests

• Correct errors once identified

Failure to cooperate can lead to penalties even if no additional tax is due.

How Long Does a HMRC Investigation Take?

This is one of the most common questions I get.

The honest answer is it depends.

Aspect enquiries can be resolved in weeks. Full enquiries can take months or longer especially if multiple years are involved or records are poor.

VAT inspections may be completed quickly if records are organised or they can extend if issues are identified.

What makes the biggest difference is how prepared and responsive you are.

The Role of a Bedford Accountant During an Investigation

When a client comes to me with a HMRC investigation the first thing I do is slow things down. Panic leads to mistakes.

A Bedford accountant typically helps by:

• Reviewing the HMRC letter and explaining what it means

• Clarifying the scope of the investigation

• Acting as agent and point of contact with HMRC

• Gathering and reviewing records before submission

• Preparing explanations and schedules

• Challenging incorrect assumptions

• Negotiating outcomes where appropriate

This support is not just technical. It is practical and emotional. Having someone handle communication reduces stress and prevents missteps.

What Happens If HMRC Finds Errors?

If HMRC identifies errors the outcome depends on the nature of those errors.

Innocent Errors

If errors are deemed innocent HMRC will usually correct the position and request payment of any tax due plus interest. Penalties are often reduced or not applied.

Careless Errors

If HMRC believes reasonable care was not taken penalties may apply. The level depends on behaviour and cooperation.

Deliberate Errors

In cases of deliberate understatement penalties are higher and in rare cases criminal investigation may follow. From experience this is uncommon for typical small business and individual cases.

The key point is that cooperation and transparency significantly influence outcomes.

Penalties and How They Are Calculated

Penalties are based on behaviour and disclosure.

HMRC considers:

• Whether the error was careless or deliberate

• Whether disclosure was prompted or unprompted

• The quality of cooperation

• The accuracy of information provided

Penalties are expressed as a percentage of tax understated and can often be mitigated through good cooperation.

This is where experienced representation adds real value.

Common Myths About HMRC Investigations

Over the years I have heard many myths.

One is that HMRC will automatically go back many years. In reality there are statutory limits based on behaviour.

Another is that investigations always lead to penalties. Many do not.

Some believe that having an accountant makes HMRC more suspicious. From experience the opposite is true. HMRC often prefers dealing with professionals.

How to Prepare If You Are Contacted by HMRC

If you receive a letter there are sensible steps to take immediately.

• Do not ignore it

• Do not respond emotionally

• Gather records calmly

• Seek professional advice early

• Do not guess answers

• Be honest but measured

Early advice often limits the scope and duration of the investigation.

Reducing the Risk of Future Investigations

While no one can guarantee you will never be checked there are steps that reduce risk.

• Keep clear and complete records

• Separate personal and business finances

• File accurate returns on time

• Avoid aggressive assumptions

• Seek advice when unsure

• Review returns before submission

From experience most investigations arise from preventable issues.

A Real World Example From Experience

To bring this to life consider a Bedford based sole trader who received a letter about high expense claims.

HMRC requested bank statements and explanations for certain costs. The client was worried they had done something wrong.

On review the expenses were legitimate but poorly categorised. With clear schedules and explanations the enquiry was closed with no adjustment.

Without support the client might have responded poorly or provided confusing information leading to extended scrutiny.

Should You Worry About a HMRC Investigation?

Concern is natural but fear is often misplaced.

HMRC investigations are part of the tax system. They do not imply guilt. They require organisation honesty and patience.

With proper handling most cases are resolved without serious consequences.

The key takeaway

What really happens during a HMRC tax investigation is usually far more procedural and less dramatic than people expect.

HMRC asks questions you provide answers and the position is clarified. Problems arise when people panic ignore correspondence or try to handle complex issues without support.

Bedford accountants deal with these situations regularly. Our role is to guide protect and resolve not to escalate.

If you ever receive a HMRC letter the most important thing to remember is that you are not alone and you have options.

Handled correctly a tax investigation does not have to define you or your business. It is simply a process to be managed calmly and professionally.

If you would like to explore related guidance, you can visit our Bedford Accounting Hub, which brings together practical advice for Bedford clients.