The letter nobody wants, at a time when more people are getting one
There are few things that focus a director’s mind like an envelope from HMRC that opens with the words “we are checking your company’s tax return.” The reaction is almost always the same: a feeling of anxiety followed by an irrational mental audit of everything that might be wrong and a strong urge to either fire back a defensive reply or ignore it and hope it goes away.
Here is the uncomfortable context. HMRC is under real pressure to close the tax gap, which it now estimates at close to £47 billion a year. Small businesses have become the largest single contributor to that gap, growing from under half of it a few years ago to around sixty per cent today. The government has backed HMRC with roughly £1.7 billion over four years to recruit about 5,500 additional compliance and 2,400 debt management staff and the yield from investigations into smaller businesses and individuals has already climbed £6.3 billion last year. Spending Review 2025, HMRC recovers 23% more tax per investigation.
Enquiries into companies are becoming more common and the taxes where owner-managed businesses are most exposed to: corporation tax, PAYE and VAT.
Our experience lies in corporate HMRC enquiries not personal.
What is an enquiry?
It is HMRC exercising a statutory right to check that a return is correct. Some enquiries are random. Many are prompted by something specific: perhaps a company that shows revenues consistently but is on a book loss, a large one-off charge appearing in the books like amortisation on an intangible or simply someone alerting the revenue about potential tax frauds. The letter HMRC sends is usually factual, it would simply state – we are opening an enquiry for the following matters. Let’s not get this wrong, this is more often than not, investigative with the aim of checking a company’s tax affairs.
It also helps to know that enquiries come in two broad shapes. An aspect enquiry looks at one item, perhaps a particular expense category or a single VAT quarter. A full enquiry examines the whole return. Being clear about the scope is important. A great deal of stress, and a good deal of unnecessary disclosure, comes from businesses answering questions that were never asked.
Corporation tax enquiries
For corporation tax, HMRC generally has twelve months from the date a return is filed to open an enquiry. It’s often called a compliance check. Once a check is open, HMRC will typically ask to see the records behind the numbers: the analysis supporting your figures, directors’ loan account movements, large or unusual expenses, related-party transactions and the treatment of anything that involves judgement, such as capitalisation or valuation of intangibles.
If HMRC believes tax has been underpaid outside the normal enquiry window, it can still act through a discovery assessment, which is where the longer time limits come into play.
https://www.gov.uk/hmrc-internal-manuals/cotax-manual/com71005
PAYE and employer compliance reviews
PAYE enquiries often arrive as an “employer compliance check” and they frequently involve a visit or a request to inspect records rather than a single letter about one figure. The areas HMRC returns to again and again are the boundary between employment and self-employment, including off-payroll working and IR35, the treatment of benefits in kind and expenses, termination payments and for anyone in construction, the Construction Industry Scheme.
Payroll is a complex area and sometimes simple things like submitting an EPS file twice can cause duplicated records on HMRC’s side which might take years to unravel. HMRC’s dispute resolution portal is currently active and they encourage corrections / challenges to their assessments to be logged via this.
VAT enquiries and inspections
VAT enquiries tend to focus on the accuracy of returns, the evidence behind repayment claims, partial exemption, the treatment of cross-border supplies and whether the underlying records actually support the figures submitted. Commonly a first time rebate claim is nearly always checked even if they tend to be small, simply because the accuracy of a rebate claim needs to be questioned and answers provided logged. We almost always expect this so are extra careful of first rebate claims.
Powers of exercise, the timescales and penalties
HMRC has broad information powers. It can issue a formal information notice requiring you to produce documents and data and there are consequences for ignoring a brown envelope. That said, a formal notice still has to be reasonable and relevant and you are entitled to understand why something is being requested.
The time limits depend on behaviour. As a rule of thumb, HMRC can go back four years in ordinary cases, six years where there has been carelessness and up to twenty years where behaviour is deliberate. How a mistake happened matters as much as the mistake itself.
Penalties follow the same logic. They are driven by behaviour, from an innocent error attracting no penalty, through carelessness, to deliberate and concealed and they are reduced by the quality of your disclosure and cooperation.
What do I do when I get a compliance check notice?
Do not panic
The fundamental rule of all business applies here too. Do not panic. Keep your calm, we know this is easier said than done. If looking at the letter is causing you anxiety, pick up your phone and call your accountant (if you have one). An enquiry is not a point to appoint an accountant. An accountant who has worked with you can understand and defend your position much more effectively. We’ll tell you our process here.
Read the letter in full
This is non negotiable, you must calm down and read the letter in full. Often it requires reading more than once even for professionals. The main takeaway you will find is that a lot of what the initial letter says is procedural. Requirements around how to communicate with HMRC, what documents need to be provided and within what time frame. Often there is a case officer assigned who will be named on the letter.
Write a holding email if necessary
Most enquiries are now dealt with via emails. First port of call – no harm in acknowledging the letter has been received, you need 15 (or how many ever) working days to coordinate the process with your accountant. If you need more time, say that upfront rather than leave it to the last – there is no guarantee that HMRC will allow this, but our experience has been that they are reasonable and would like to conclude the matter for everyone involved. All check letters will have a due date by which the initial set of answers are expected.
Documentation, documentation and documentation
Be M-E-T-I-C-U-L-O-U-S with documentation, the inquiry isn’t going anywhere vaguely good for you if you don’t have documents. Companies often falter as there was perhaps no supporting documentation to evidence much of what was accounted for. Then you try and reconstruct what might have been the case when it was originally put through the books. This is not recommended, these are trained professionals and will know from a mile away that something has been created for the sake of providing an answer.
Get in touch with professionals
A director trying to run a business and handle an enquiry at the same time is at a disadvantage. Bringing in your accountant or adviser at the start, rather than once things have escalated, almost always saves money and stress. If this is someone you have worked with for sometime, they’d likely be able to hit the ground running – they know you, they know the business.
If it’s someone new, give them the circumstances of the enquiry and be honest about your position and what documents you have (or don’t have). They will help organise answers for HMRC and help coordinate the best way to approach this.
The outcome of an enquiry
After the enquiry is concluded, HMRC will drop you an email and a formal letter to discuss the result.
It can be any one of,
- Correction to returns already filed which they will explain the process for
- This could lead to additional tax payments needed and often has penalties and interests attached.
- There maybe appeals necessary here and HMRC has a standard process for the same – they generally mention this also on the conclusion letter
- The review can be concluded with to-dos for the future – HMRC can define how certain transactions should be treated in the books as an example or it may disallow certain deductions in future returns. Take note and follow the process for all future returns.
- Sometimes the conclusion is just that matters as required have been checked and no changes are to be made and no additional tax payments are needed. This is common in the case of first VAT returns. HMRC simply releases the rebate if their check has been satisfactory.
What can we do today to help with this in the future?
One of the easiest things to do is to make sure you have adequate supporting docs for the accounting entries you are passing or the policies you are using. What HMRC or any tax authority is looking for really are clear answers to their questions. Not fabricated things run via Claude or Chat GPT.
Almost everything that makes an enquiry painful, the scramble for records, the reconstructed explanations, the sinking realisation that a reasonable decision was never written down, is decided months or years before a letter arrives. There doesn’t need for any kind of irrational fear here, it’s common to feel anxious when you are being asked questions – almost like having a bag check at an airport. You know you are all clear but what if there is something in my bag that I shouldn’t be carrying?
Our experience with HMRC itself for most enquiries have been fair. It takes time and patience for sure, but it’s not undoable. There are people on both sides of the table having a rational conversation to reach a reasonable conclusion.
Note: This article is general information only. It is not tax advice and specific situations should always be discussed with your adviser.
