HMRC Compliance Checks: What Actually Triggers an Investigation

Why this matters?

Last year HMRC’s specialist Wealthy Mid-Size Business Compliance (WMBC) team doubled the tax it clawed back, raking in £1.5 billion. Much of that success came from Connect – the department’s AI-powered data-matching tool that scans 55 billion lines of information to spot inconsistencies. The same algorithms run across every Self-Assessment return, VAT submission and company account in the UK, meaning even honest mistakes can land on HMRC’s radar.

If you run a limited company, side hustle or rental portfolio, understanding what actually trips the alarms is the first step to staying audit-free.

What is a compliance check?

HMRC uses the phrase “compliance check” for any formal look at your records. There are three main types:

Full enquiry

The entire tax return (personal or corporate). All books and records for the year in question

Aspect enquiry

A specific entry that seems odd. One section, e.g. travel expenses

Random check

Quality-control sample (around 7 % of cases). Any areas HMRC chooses

Alongside these, HMRC can review your bookkeeping systems without opening a return, often called a record-keeping review.

How does HMRC selects it’s cases

More than 90 % of investigations are risk-led. Returns are fed into a risk-scoring engine that compares your data with:

• Previous filings

• Industry averages

• External data from banks, Companies House and even social media

The rest come from:

• Targeted campaigns – HMRC sometimes blitzes a sector such as online resellers or buy-to-let landlords.

• Random selection – around 7 % keep everyone “on their toes”.

The top 10 HMRC compliance check triggers

Below are the most common red flags our clients see. Tick any that might apply to you and consider a pre-emptive review.

1. Data mismatches
   Connect cross-checks PAYE, VAT, bank interest, property income and Companies House filings. One mis keyed figure can create an alert.

2. Repeated late filing or payment
   Chronic lateness suggests poor controls. Three late Self-Assessment returns in a row is asking for questions.

3. Large, unexplained swings in income or expenses
   Sudden profits or losses outside industry norms raise eyebrows.

4. Unusual or excessive claims
   Home-office use, travel, subsistence and R&D relief are common areas where the numbers simply look too high.

5. Cash-heavy or “high-risk” sectors
   Construction, hospitality and e-commerce fulfilment centres remain under the microscope.

6. Offshore income or complex structures
   HMRC’s wealthy and mid-size business units actively mine overseas data feeds.

7. Employer-related issues
   PAYE discrepancies, missing benefits-in-kind and “ghost” employees are classic PAYE risk signs.

8. IR35 and contracted-out services
   Personal Service Companies and agencies face extra scrutiny over employment status.

9. Third-party tip-offs
   Banks, suppliers, disgruntled ex-staff and even border-force information can kick-start a review.

10. Lifestyle versus reported income
    Flash cars, big mortgages and modest drawings are hard to reconcile and the Connect system compares them automatically.

Pro-tip: Snap receipts on your phone and attach them to transactions as soon as they land in your software. Late-night spreadsheet catch-ups are when innocent typos sneak in.

What to expect if the brown envelope arrives

1. Initial letter: outlines what HMRC wants and the deadline to respond (usually 30 days).

2. Information notice: HMRC can request bank statements, invoices, contracts and even personal diaries.

3. Meetings: optional, but declining without good reason can escalate matters.

4. Outcome: HMRC may accept your explanation, adjust your return, or issue penalties (up to 100 % of the extra tax).

5. Appeal window: normally 30 days if you disagree.

 Proactive defence: keeping a low-risk profile

• Reconcile bank feeds regularly.

• File returns early, not on the deadline.

• Benchmark key ratios against peers.

• Keep digital copies of every receipt for six years.

• Consider tax-investigation insurance, fees can mount quickly if HMRC digs deep.

How J-Benn Finance help can help

We compile and review before you “submit”, spotting mismatches the algorithms love. Our investigation cover means our fees are handled if HMRC ever calls. Above all, our bookkeeping service is knowledgeable and experience, which keeps your numbers clean and your stress levels low.

Feeling uneasy? Book a free 30-minute call and sleep easier knowing your records are bullet-proof.

Book your call

FAQs

Can HMRC investigate a company that has closed?
Yes. They have up to 20 years in cases of deliberate behaviour.

How far back can HMRC go in a compliance check?
Up to 4 years for innocent errors, 6 years for carelessness and 20 years for deliberate mis-statements.

Does a refund automatically trigger an enquiry?
No, but unusually large refunds are reviewed by an officer before release.

Will HMRC phone me first?
Almost never. Genuine investigations start with a brown-and-white letter.

Can I handle an enquiry myself?
You can, but professional representation often shortens the process and reduces penalties.

Wrap-Up

HMRC compliance check triggers are mostly avoidable with disciplined bookkeeping and timely filing. If any of the red flags above feel familiar, let’s talk before HMRC does.