HMRC Investigations for Self Employed

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Tax Investigation, as it stands, looks like an intimidating word. But we live in a law-abiding society and must follow the law and guidelines. As experienced Tax Advisors, we come across HMRC daily for different reasons, and sometimes, we get an insight into how the officers at HMRC work and perform their duties. In our experience, investigating someone’s tax affairs is not normal. From compliance checks to complex investigations like Code of Practice 9 will have a background. And it is very much important to understand the circumstances surrounding business operations, the individual taxpayer and the associated parties. 

How are HMRC Tax investigations conducted?

From a simple letter to unannounced visits and dawn raids, HMRC has powers to investigate any business. Depending on the severity of the case, HMRC officers will apply for authority to conduct an investigation. For this reason, it is very important to understand HMRC letters, the undelaying factors that led to the Investigation and how to deal with HMRC. 

Why does HMRC investigate self-employed individuals?

There is no definite answer, why does HMRC investigate self-employed who have little income and trying to make both ends meet? But self-employed individuals, who calculate their own taxes and file tax returns are more likely to be investigated. HMRC stipulates that taxpayers may have made an unintentional mistake, resulting in a potential revenue loss. Changing tax laws, rates, and allowances is another factor where self-employed persons may have paid little tax, and HMRC may be looking for certain explanations. 

How does HMRC decide which business or person to investigate? 

There is no direct answer to this question, and very little information is available on this subject. Most of the time, taxpayers know what is wrong with their accounts or tax returns, which has triggered a tax investigation. But apart from that, people can guess what may have happened as HMRC will not tell why they have started an investigation. HMRC have developed tools and software which have access to all bank accounts, data of all card machines and 60 other national databases. This software is connected to a benchmarking system, which analyses historical business tax records in each industry. Any business with a large variation to this benchmark will likely be investigated unless they have explained the reasons in their tax returns. Besides this, HMRC randomly selects 5% Self Assessment tax Returns to check if these have been filled correctly. 

What other factors trigger HMRC Investigation?

HMRC maintains its trust in the taxpayer and will not write to you if they know the answer. Most of the time, the amount of tax involved triggers the tax investigation. We have mentioned a few factors below. 

Late or Non-submission of Tax Return

Normally, if you do not file a tax return, HMRC will send you non-filling penalties, which can go up to £1,600 and then 5% for late payment of tax. Frequently filing late tax returns without a reasonable cause will trigger a tax investigation. HMRC will do its homework before they issue a letter of Investigation. It means they have checked your records and other sources, and in case you are self-employed, they may have checked your standard of living, including holidays you have taken during the year. 

Inaccurate Tax Returns

HMRC will not accept any inaccurate tax returns under self assessment. HMRC have the power to go back 20 years, and providing false information deliberately may result in severe penalties, including criminal prosecution in the most extreme cases. Even if you need to correct your past tax returns, the penalty for the requirement to correct is from 30% to 100%, depending on the circumstances. 

Unexplained and Unrelated Expenses

Most of the time, HMRC will compare tax returns and accounts and find the difference and variance between expenses of two consecutive years. Expenses must be related to business. For example, a sole trader running a retail store claiming expenses for subsistence and travel is a call for explanation. Similarly, a contractor working from home claiming more than allowed “fixed deduction of expenses” in his tax return is likely to be investigated. These are very few examples where HMRC can pick up by looking at the accounts, nature of business and tax returns for previous years.   

Increase in Income and Assets

You may have heard about unexplained wealth orders. This is a relatively new concept in the UK, where courts have the power to question sources of income where no evident trail of income or assets is available. This guide is only applied to high net-worth individuals, but it’s important to see the effects on individuals and small businesses. Any increase in assets and income without a proper trail will likely be investigated. Most of the time, HMRC will investigate the circumstances and then ask for the details to check the truthfulness and cooperation of the taxpayer. If there is an unsatisfactory explanation or any element of criminal activity, the case will be forwarded to the police under tax cheating charge and become a criminal inquiry. 

Previous HMRC Investigation

Whenever HMRC finalises a Tax Investigation, it is normal to keep the business or individual at high risk for some time. Mort of the time, they will revisit within five years to check if tax is correctly calculated and timely paid. Any late payment or missed compliance date can start a new investigation. Individuals with a history of late payments and previous investigations where tax liability was more than £100k are likely to be investigated within ten years of the last Investigation.  

Industry Specific Investigations

If you receive a tax investigation letter due to factors beyond your control or as a result of a recent court decision, you are likely aware of the potential impact it can have. We advise businesses to make a provision for potential tax liabilities in case they arise, particularly if there is an ongoing industrial case or review with HMRC.

What should I do when I receive HMRC Investigation letter?

If you receive an investigation letter from HMRC, you must know your rights and options. First and foremost, you need to check the legality of the letter. For example, if the letter pertains to certain tax years, HMRC may be restricted from investigating that particular tax year due to being time-barred. On the other hand, if no particular tax year is given and is a general letter for information, you must ask HMRC about the tax years under Investigation instead of giving them an open end. In very serious tax investigations like COP9, HMRC can go back 20 years but can be restricted to a smaller time frame depending on the taxpayer’s circumstances. 

Our Advice

We always advise our clients to take proactive measures to avoid tax investigations. Mistakes happen and can be corrected. There are legal ways to reduce the tax burden. All records should be updated and kept ready for an inspection. This action demonstrates the taxpayer’s commitment to compliance and reduces the risk of legal and reputational damage. If you have received letter for compliance check, VAT Inspection, Undisclosed Foreign Income, Code of Practice 8 Investigation or COP9 Investigation; we have tax experts who can help you. Call our office to discuss your case.


Our blogs and articles are for information only. If you need help with your specific tax problem or need advice for your business please call us on 0800 135 7323