Understanding HMRC Audits: What to Expect, What Triggers Them, and How to Prepare Effectively
An HMRC audit is a check to make sure your business is paying the right amount of tax. It sounds stressful, but with good records and preparation, it’s manageable. Would your business be ready if HMRC decided to review your accounts today?
It is important to understand that an HMRC audit, officially known as a compliance check, is part of how the government ensures that UK businesses are paying the correct amount of tax and following the rules.
Handled properly, an audit can be a straightforward process that confirms your business is on the right track. But do you know?
What an HMRC audit involves, what triggers them, how far back HMRC can look, and most importantly, how you can prepare and protect your business.
What happens during an HMRC audit?
When HMRC selects your business for an audit, you’ll receive a formal notification. This typically arrives by letter, although in rare cases, it might be an email or phone call. HMRC will then specify which documents and records they require to conduct their review. These could include:
- Your most recent tax return and associated calculations
- Business bank statements
- Sales and purchase invoices
- PAYE records, including payroll and RTI submissions
- VAT returns and supporting documentation
- Self-Assessment records for sole traders or partnerships
Depending on the audit’s scope, HMRC may carry out the audit remotely, reviewing the documents you send, or they may arrange a site visit to your premises. Additionally, HMRC may request interviews with you or your team to clarify any aspects of your business operations or financial calculations.
After completing the audit, HMRC will issue their decision. The outcome could be:
- No further action: Your records are in order, and no issues are identified.
- Correction or adjustment: HMRC finds errors or discrepancies and requires you to amend your filings and pay any additional tax owed.
- Penalties: If there’s evidence of negligence or deliberate misreporting, HMRC may impose penalties.
Clear communication, full cooperation, and accurate recordkeeping are key to ensuring a smooth and swift audit process.
Types of HMRC tax audits
The type of audit your business faces depends on what has triggered the review and how extensive HMRC feels the investigation needs to be. Here are the main types:
- Full Enquiry: This is the most thorough audit. HMRC will examine all aspects of your tax return and financial records, often spanning multiple years of documentation. A full enquiry usually occurs when HMRC suspects significant underpayment or inconsistencies. In these cases, engaging a qualified tax adviser early on is advisable.
- Aspect Enquiry: An aspect enquiry targets a specific part of your tax return, such as a large expense claim or a property sale. This is less invasive than a full enquiry and can usually be resolved more quickly, provided you supply the required documentation.
- Random Checks: These audits are purely random and don’t stem from any particular suspicion or mistake. HMRC uses random checks to ensure fairness in compliance across all businesses. Even if your records are immaculate, you may still be selected for a random audit.
What triggers an HMRC audit?
Certain factors can raise the likelihood of an audit, particularly if they appear repeatedly or without explanation. HMRC uses sophisticated data-matching tools to identify discrepancies between returns, so even minor inconsistencies can catch their attention. Common triggers include:
- Inconsistent or incorrect figures: Discrepancies between sections of your return or across years can prompt an investigation.
- Industry risk: Certain industries, like hospitality and construction, are considered higher risk due to factors like cash payments and subcontracting.
- Frequent late returns: Chronic lateness may signal poor financial management.
- Unusual or outlier data: If your figures differ significantly from industry norms, HMRC may take a closer look.
- Large VAT claims: High-value VAT refunds can signal potential fraud.
- Low income with high turnover: This may indicate underreporting of income.
What happens if you overpay?
If HMRC determines you’ve overpaid tax, you may be eligible for a refund. Claims for overpaid tax must be made within four years from the end of the relevant tax year.
What is an assessment tax return?
An assessment tax return is issued by HMRC when they don’t receive your tax return or if they believe it’s incorrect. If you disagree with their calculation, you must appeal within 30 days. Always double-check your tax calculations and respond promptly.
How far back can HMRC audit?
HMRC has the authority to review your business’s records for several years, depending on the circumstances:
| Type of error | How far back HMRC can go |
| Innocent or minor errors | Up to 4 years |
| Careless errors | Up to 6 years |
| Deliberate tax evasion or fraud | Up to 20 years |
HMRC expects businesses to keep records for at least six years, but in some cases (such as for property or capital gains), you may need to retain them for longer.
How often does HMRC audit self-employed individuals?
Self-employed individuals are often a focus for HMRC, primarily because their income and expenses are self-reported. You may be more likely to be audited if:
- Your business deals with large amounts of cash
- You frequently submit late or amended returns
- Your income fluctuates in ways that aren’t clearly explained
However, many self-employed individuals never undergo an audit. Accurate and transparent reporting is key to staying off HMRC’s radar.
Minimising the risk of an HMRC tax audit
While it’s impossible to completely avoid the risk of an audit, there are steps you can take to reduce the likelihood of one, particularly those triggered by your business practices.
Understand your tax obligations
The first step in minimising audit risk is understanding which taxes apply to your business and ensuring you meet all obligations. Depending on your business structure, you may be responsible for:
- Corporation tax (for limited companies)
- VAT (if turnover exceeds the registration threshold)
- PAYE and National Insurance (if you employ staff)
- Self-Assessment (for sole traders, partnerships, and company directors)
If you’re unsure about your responsibilities, it may be beneficial to consult with a tax expert to avoid any mistakes.
Keep accurate and organised records
Maintaining clear, accurate, and well-organised records is crucial. HMRC expects businesses to keep comprehensive records, including:
- Digital copies of receipts, invoices, and bank statements
- Up-to-date payroll data
- Well-categorised business expenses
- Detailed mileage and travel logs
- Reconciled accounts
Using cloud-based accounting software can simplify this process by automating tasks like VAT returns, RTI reporting, and invoice tracking.
Submit returns on time and review them carefully
Late or rushed submissions raise red flags with HMRC. Always give yourself enough time to check your tax returns for accuracy before submitting them. If you do make a mistake, addressing it promptly can often mitigate or eliminate penalties.
The importance of accurate records and professional advice
The best way to prepare for an HMRC audit is to maintain detailed and accurate financial records. Poor recordkeeping is one of the quickest ways to invite scrutiny from HMRC. Accurate records not only help ensure compliance but can also reduce your tax liability.
If an audit reveals errors or discrepancies, you may need to pay interest on any unpaid taxes, which can quickly add up. Engaging a tax adviser or accountant can help you navigate the audit process smoothly and ensure a solid response if HMRC uncovers issues.
Final Thoughts
HMRC audits don’t have to be stressful if you’re well-prepared. By keeping accurate records, submitting timely returns, and understanding your tax obligations, you can reduce your audit risk and handle any investigations with confidence.
If in doubt, seek professional advice to ensure your tax affairs are in order and to minimise any potential penalties.
