Avoid the taxman’s eye: The most common reasons and telltale signs why HMRC investigates tax irregularities

These investigations can range from routine checks to full-scale inquiries that delve deep into your financial affairs.

Understanding the most common types of HMRC investigations can help taxpayers stay compliant and prepare appropriately should they face scrutiny from the tax authority.

Aspect inquiries look at tax returns

Aspect inquiries focus on specific parts of a tax return instead of looking at every detail.

HMRC may ask about certain claimed expenses, income sources that were not fully reported, or differences between various submissions.

These focused investigations usually start with a formal letter asking for clarification or more documents related to the area being reviewed.

For example, if you’ve claimed unusually high business travel expenses compared to previous years or industry norms, HMRC might request evidence to support these claims.

While less intrusive than full investigations, aspect inquiries should still be taken seriously and responded to promptly.

Full investigations can cover several years of information

When HMRC suspects serious tax problems or fraud, they might start a full investigation.

This thorough review looks at all parts of your tax situation and can cover several years.

Full investigations can begin due to random selection, reports from whistleblowers, or unusual patterns in your tax history.

During a full investigation, HMRC officers can ask for documents, formally interview you, and even visit your business.

If they find major issues, the process can take a long time, cause stress, and lead to significant costs.

Business record checks

For small businesses and self-employed individuals, HMRC checks business records to ensure you keep proper records.

These checks look at whether you are maintaining accurate records to support your tax returns.

Poor recordkeeping can lead to mistakes on your tax returns and may raise concerns for HMRC.

Keeping your records organised and complete is one of the easiest ways to avoid an investigation.

VAT visits and inspections

If your business is registered for Value Added Tax (VAT), you may have VAT inspections.

These checks review if you are correctly charging, collecting, and paying VAT.

HMRC pays special attention to businesses with unusual VAT patterns, like those that often claim refunds or report figures that are very different from industry standards.

Employer compliance reviews

These investigations look at how businesses manage their PAYE (Pay As You Earn) duties, National Insurance payments, and employee benefits.

HMRC checks for problems like incorrectly labelling workers as contractors, not reporting benefits, and using the wrong tax codes.

Aatif Malik, founder of Tax Accountant and specialist tax advisor, says: “In my experience, there has been a noticeable increase in the intensity of employer compliance reviews in recent years.

“HMRC has sharpened its focus on the gig economy, closely scrutinising arrangements that may obscure the true nature of employment relationships.

“As a result, businesses must conduct regular reviews of their contractor agreements, ensuring they align with current guidelines and best practices -particularly in the wake of the IR35 reforms.

“This proactive approach not only safeguards against potential penalties but also promotes fair labour standards within the evolving workforce landscape.”

Specialist investigations teams into tax evasion

HMRC has special teams that focus on different areas of tax avoidance or evasion.

The Fraud Investigation Service deals with the most serious cases.

The High Net Worth Unit targets individuals with assets over £10m.

Other teams look into offshore accounts, property deals, and cryptocurrency.

These specialists use advanced data analysis tools and have access to international agreements for sharing information, making it harder to hide assets or income.

What triggers HMRC investigations?

While HMRC never discloses its exact selection criteria, common triggers include:

- Significant variations in income or expenses between tax years

- Income that doesn't match your lifestyle (lifestyle inconsistency)

- Tip-offs from whistleblowers or other government agencies

- Random selection as part of HMRC’s general compliance program

- Industry-specific campaigns targeting sectors with high non-compliance rates

- Consistent late filing or payment of taxes

- Participation in known tax avoidance schemes

The investigation process

Most investigations start with a letter or phone call from HMRC.

This contact will tell you which parts of your tax situation they are looking at and what information you need to provide.

The timeline for an investigation can vary greatly.

Simple inquiries might be resolved in months, while full investigations can take years. During this time, HMRC will ask for documents and explanations and may set up meetings or interviews with you.

Penalties and consequences

If HMRC uncovers tax discrepancies, consequences can include:

- Payment of any tax owed, plus interest

- Penalties of up to 100% of the unpaid tax, depending on whether the error was careless, deliberate, or deliberate with concealment

- For serious cases, criminal prosecution and potential imprisonment

- Increased likelihood of future investigations

Protecting yourself against tax investigations

Keeping detailed records and ensuring accurate tax submissions is vital for protecting yourself against tax investigations.

If you receive a notification of an investigation, seek professional advice immediately.

Tax experts can clarify what HMRC is looking for, help gather relevant documentation and facilitate effective communication with investigators.

While HMRC has considerable powers, taxpayers also have rights during the investigation process, such as the right to appeal against any perceived incorrect decisions.

With the rise in tax investigations due to efforts to close the tax gap, it is essential for all taxpayers - from individuals to multinational corporations - to understand common investigation types and maintain compliance.

By recognising warning signs and addressing potential issues early, you can reduce the chances of encountering the stress and consequences of an HMRC investigation.

Mr Aatif Malik, is the Managing Director of Tax Accountant – A Specialist Tax Consultancy