Receiving a letter from HM Revenue and Customs about a compliance check can be unsettling. The request may concern one entry on a tax return, or it may involve a wider review of the business’s income, expenses, VAT, payroll or accounting records.
An HMRC check does not automatically mean that fraud has been alleged or that the business has done something wrong. Checks can range from a straightforward request for supporting documents to a detailed investigation covering several accounting periods.
However, every request should be taken seriously. Missing a deadline, providing incomplete information or responding without understanding the scope of the check can make the process longer and more expensive.
Accurate bookkeeping provides the evidence needed to explain the figures reported to HMRC. It allows invoices, bank transactions, expenses and tax calculations to be traced back to their supporting records.
This guide explains what an HMRC compliance check involves, what to do after receiving a letter and how organised bookkeeping can support an effective response.
What Is an HMRC Compliance Check?
A compliance check is a review carried out by HMRC to establish whether a person or business has:
- Paid the correct amount of tax.
- Paid tax at the correct time.
- Claimed the correct allowances and reliefs.
- Maintained records supporting its returns and calculations.
- Complied with the reporting requirements for the relevant taxes.
Compliance checks are also sometimes described as tax enquiries, investigations or inspections. The exact procedure depends on the tax, the issues being examined and the seriousness of HMRC’s concerns.
What Can HMRC Check?
HMRC can examine different aspects of a person’s or business’s tax position.
A check may involve:
- Self Assessment tax returns.
- Company Tax Returns.
- Annual accounts and tax calculations.
- VAT returns.
- PAYE and payroll records.
- Construction Industry Scheme returns and deductions.
- Capital Gains Tax.
- Employment status and off-payroll working arrangements.
- Business expenses and capital allowances.
- Tax reliefs and repayment claims.
- International or offshore income and transactions.
- Whether a business registered for a tax at the correct time.
HMRC should normally explain which tax, accounting period or issue it wants to examine. Read the opening letter carefully before gathering records.
A Compliance Check Does Not Always Mean Fraud
Many checks concern an apparent inconsistency, a repayment claim, an unusual figure or missing supporting information.
For example, HMRC may ask why:
- Business expenses increased substantially.
- Reported turnover does not appear to agree with VAT returns.
- Profit margins changed significantly.
- A large repayment was claimed.
- Payroll figures do not agree with another submission.
- Bank deposits appear higher than reported sales.
- A particular relief or allowance was claimed.
There may be a reasonable explanation. The objective is to provide that explanation clearly and support it with reliable records.
Types of HMRC Checks and Investigations
A Check of a Particular Issue
HMRC may examine one specific item, such as a business expense, VAT claim, director’s loan account or source of income.
The request may be resolved by providing a calculation, invoice, contract or explanation.
A Wider Compliance Check
A wider check may consider several parts of the business records or tax return.
HMRC may request:
- Complete bookkeeping records.
- Bank statements.
- Sales and purchase invoices.
- Accounting software reports.
- Contracts and agreements.
- Stock records.
- Payroll reports.
- Explanations of accounting policies and business processes.
VAT or PAYE Inspection
HMRC may carry out a tax-specific review of VAT, PAYE, CIS or another reporting obligation.
A VAT check may consider:
- Sales and purchase VAT codes.
- VAT invoices.
- Reverse charge transactions.
- Zero-rated and exempt supplies.
- Import and export records.
- VAT control-account reconciliations.
- Making Tax Digital records and digital links.
A PAYE check may consider wages, benefits, expenses, employee status, National Insurance and Real Time Information submissions.
Code of Practice 8
Code of Practice 8 investigations are handled by HMRC’s Fraud Investigation Service and normally concern cases where HMRC believes there may be a significant loss of tax, including matters involving complex arrangements or avoidance.
A COP8 letter should be referred promptly to an appropriately experienced tax investigation adviser.
Code of Practice 9
Code of Practice 9 is HMRC’s civil investigation procedure for cases where it suspects tax fraud.
Under the associated Contractual Disclosure Facility, the recipient may be offered an opportunity to make a complete, accurate, open and honest disclosure of deliberate conduct and other irregularities.
COP9 has serious potential consequences. Specialist tax investigation and legal advice should be obtained immediately before making a substantive response, while ensuring that the stated deadlines are protected.
What to Do When an HMRC Letter Arrives
1. Do Not Ignore It
Read the complete letter, including any enclosed factsheets, schedules and information notices.
Identify:
- The tax being checked.
- The accounting periods involved.
- The information requested.
- The response deadline.
- The name and contact details of the HMRC officer.
- Whether the request is informal or made through a statutory information notice.
- Whether the letter refers to penalties, suspected fraud or a particular Code of Practice.
Record the deadline immediately and provide copies of the correspondence to the relevant professional adviser.
2. Confirm That the Contact Is Genuine
Fraudsters can imitate HMRC correspondence, telephone numbers and email addresses.
Check:
- Whether the letter contains the correct tax and business references.
- Whether the contact method appears in HMRC’s published guidance.
- Whether any requested email address uses an official domain.
- Whether the contact can be confirmed using independently obtained HMRC details.
Do not disclose passwords, banking credentials or security codes in response to an unexpected message.
3. Preserve the Records
Do not delete, amend, recreate or replace records without retaining a clear audit trail.
Preserve:
- Accounting software data.
- Original invoices and receipts.
- Bank and credit card statements.
- Emails and correspondence.
- Contracts and quotations.
- Payroll reports.
- VAT workings.
- Tax calculations.
- Copies of returns as originally submitted.
- Previous advice received about the transactions.
If corrections are required, document what was changed, why it was changed and who authorised the adjustment.
4. Establish the Scope
Do not assume that HMRC wants every document held by the business.
Identify precisely:
- The questions being asked.
- The periods covered.
- The transactions involved.
- The format in which information should be provided.
- Whether HMRC is requesting statutory records or wider supporting evidence.
Where the scope is unclear, ask HMRC to explain the request. This can prevent unnecessary work and reduce the risk of sending irrelevant or misunderstood information.
5. Appoint the Right Adviser
The appropriate adviser depends on the seriousness and technical nature of the check.
| Issue | Potential Support |
|---|---|
| Missing invoices, unreconciled accounts or bookkeeping queries | A professional bookkeeper may help organise and explain the records. |
| Tax return calculations or technical tax treatment | An accountant or qualified tax adviser may be required. |
| A disputed VAT classification | A VAT specialist may be appropriate. |
| Employment status or payroll dispute | A tax adviser with employment-tax experience may be required. |
| COP8, COP9 or suspected fraud | A specialist tax investigation adviser and, where appropriate, a solicitor should be contacted immediately. |
The adviser must normally be formally authorised before HMRC can discuss the case with them.
Documents HMRC May Request
The documents required depend on the issue under review.
Common requests include:
- Sales invoices and credit notes.
- Supplier invoices and receipts.
- Business bank statements.
- Credit card and payment-provider statements.
- Cashbooks and till reports.
- Accounting software reports and transaction exports.
- General ledger and nominal-account details.
- Bank reconciliations.
- Aged customer and supplier reports.
- Stock records.
- Payroll reports and employment contracts.
- VAT account and return workings.
- CIS statements and verification records.
- Loan agreements.
- Asset purchase and disposal records.
- Mileage logs and travel records.
- Contracts, quotations and project records.
- Evidence supporting allowances, reliefs or exemptions.
HMRC may also ask how the business operates so that it can understand the relationship between the records and the tax returns.
The Importance of Bank Reconciliation
Bank reconciliation checks that the accounting records agree with the actual bank statements.
It can identify:
- Missing income.
- Duplicated expenditure.
- Unrecorded bank charges.
- Transactions entered into the wrong account.
- Customer receipts that have not been matched to invoices.
- Transfers incorrectly recorded as sales or expenses.
- Opening-balance errors.
Unreconciled accounts make it difficult to demonstrate that the reported income and expenses are complete.
A connected bank feed is not sufficient by itself. Imported transactions must still be checked, matched and reconciled against the original statement.
Reconciling Tax Returns to the Bookkeeping
The figures submitted to HMRC should be traceable to the underlying accounting records.
Useful reconciliations may include:
- Turnover in the accounts compared with sales ledgers.
- Sales in the accounts compared with VAT returns.
- Payroll costs compared with PAYE submissions.
- Subcontractor costs compared with CIS returns.
- Bank balances compared with the balance sheet.
- VAT control accounts compared with returns and payments.
- Tax computations compared with the final accounts.
Differences may be legitimate. For example, VAT timing, accruals, prepayments, asset disposals and accounting adjustments can produce different figures. The difference should nevertheless be explainable.
Responding to HMRC Questions
Responses should be accurate, complete and limited to what can be supported.
When preparing a response:
- Address each question separately.
- Use the same numbering as HMRC’s letter.
- Explain the business context where necessary.
- Attach clearly labelled supporting documents.
- Explain calculations and reconciliations.
- Distinguish facts from estimates or assumptions.
- State clearly where a document is unavailable and explain why.
- Keep a complete copy of everything submitted.
Do not guess an answer. Where additional time or information is needed, explain the position to the HMRC officer and request an appropriate extension before the deadline expires.
Informal Requests and Information Notices
HMRC may begin by requesting documents informally. It can also issue a formal information notice requiring specified information or documents.
A formal notice should be reviewed carefully because:
- Failure to comply may lead to penalties.
- Some parts of a notice may carry appeal rights.
- The notice may specify a particular format and deadline.
- Different rules can apply to statutory records and other documents.
Professional advice may be appropriate where a notice appears unclear, excessively broad or difficult to comply with.
HMRC Visits and Inspections
HMRC may ask to visit the business, the owner’s home or an adviser’s office. It may also invite the taxpayer to attend a meeting.
A visit may involve:
- Reviewing bookkeeping and tax records.
- Understanding how sales are recorded.
- Inspecting stock, equipment or business premises.
- Discussing the business’s accounting procedures.
- Reviewing payroll or VAT systems.
- Asking about unusual or unexplained transactions.
An accountant or legal adviser can attend a visit. Clarify the purpose and proposed agenda beforehand so that the relevant records and people are available.
Keep a written note of the questions asked, answers given and documents inspected or retained.
What If You Discover an Error?
Discovering an error during a compliance check does not mean that records should be altered quietly or the issue ignored.
Discuss the error with the appropriate adviser and establish:
- Which returns and periods are affected.
- How the error occurred.
- Whether tax was underpaid or overpaid.
- Whether the same error occurred in other periods.
- How the records and returns should be corrected.
- What disclosure should be made to HMRC.
- Whether interest and penalties may apply.
The quality and timing of a disclosure can affect the level of any penalty. Complete cooperation does not guarantee that no penalty will be charged, but HMRC considers how promptly and fully the person tells, helps and gives access to information.
Reasonable Care and Penalties
An inaccurate return does not automatically result in an inaccuracy penalty.
HMRC considers the behaviour that caused the error.
| Behaviour | General Meaning | Potential Penalty Range |
|---|---|---|
| Reasonable care | Reasonable steps were taken to submit an accurate return, but an error still occurred. | No inaccuracy penalty. |
| Careless | The person failed to take reasonable care. | Generally 0% to 30% for an unprompted disclosure or 15% to 30% for a prompted disclosure. |
| Deliberate | The person knew the return or document was inaccurate. | Generally 20% to 70% unprompted or 35% to 70% prompted. |
| Deliberate and concealed | The person knew it was inaccurate and took active steps to hide the issue. | Generally 30% to 100% unprompted or 50% to 100% prompted. |
The percentages are normally applied to the potential lost revenue rather than the value of the underlying transaction.
Evidence of reasonable care can include:
- Keeping complete and accurate records.
- Reconciling financial accounts.
- Checking unusual transactions.
- Seeking advice where the tax treatment is uncertain.
- Providing complete information to the adviser preparing the return.
- Reviewing returns before submission.
- Following appropriate professional advice.
Using a bookkeeper or accountant does not remove the taxpayer’s responsibility to provide accurate information and take reasonable steps to prevent errors.
How Far Back Can HMRC Look?
The relevant time limit depends on the tax, the circumstances and the behaviour that caused any loss of tax.
HMRC’s general assessment framework includes:
| Circumstance | General Assessment Period |
|---|---|
| Normal position | Up to four years from the end of the relevant tax period. |
| Careless behaviour | Up to six years for specified taxes and circumstances. |
| Certain offshore matters | Up to 12 years. |
| Deliberate behaviour | Up to 20 years. |
These are general limits rather than a complete statement of the law. Different enquiry, discovery and assessment rules can apply according to the tax and filing history.
Do not assume that a period is outside HMRC’s reach without obtaining advice on the specific facts.
Possible Outcomes of a Compliance Check
At the end of the check, HMRC should explain its conclusions.
Possible outcomes include:
- No change to the original tax position.
- A repayment where too much tax was paid.
- Additional tax becoming payable.
- Interest on tax paid late.
- A penalty.
- Corrections to later returns.
- Changes to bookkeeping or reporting procedures.
- A payment arrangement where HMRC agrees one.
HMRC may ask for additional tax to be paid within 30 days. Interest will normally be calculated from the original date the tax was due.
If the business cannot pay the full amount, contact the officer dealing with the case promptly rather than ignoring the liability.
What If You Disagree With HMRC?
Do not assume that HMRC’s first conclusion must be accepted without review.
Depending on the decision, the options may include:
- Providing further evidence or clarification.
- Appealing the tax decision.
- Appealing a penalty.
- Requesting an internal HMRC review.
- Using Alternative Dispute Resolution.
- Appealing to the First-tier Tribunal.
The appeal deadline is commonly 30 days from the date of the relevant decision or offer of review, although the letter should be checked for the procedure that applies.
An appeal should explain what is disputed, why it is disputed and what the correct figures or treatment should be.
Common Mistakes During an HMRC Check
- Ignoring the opening letter: This can lead to formal notices, penalties and lost opportunities to clarify the issue early.
- Responding before understanding the scope: Documents may be sent without explaining what they show.
- Guessing answers: An unsupported explanation can create further questions and undermine credibility.
- Changing records without an audit trail: HMRC may question why entries differ from those supporting the original return.
- Providing disorganised data: Large exports without schedules or explanations can prolong the check.
- Failing to reconcile the accounts: Unexplained differences between bank statements, VAT returns and accounts can widen the enquiry.
- Deleting original evidence: Corrected documents should not replace or obscure the originals.
- Assuming an adviser carries all responsibility: The taxpayer must still provide complete and accurate information.
- Missing an appeal deadline: The opportunity to challenge a decision can become more difficult after the deadline.
- Using a general bookkeeper for a specialist fraud investigation: COP8 and COP9 cases require appropriately experienced professional advice.
How Good Bookkeeping Reduces Investigation Risk
Accurate bookkeeping cannot guarantee that HMRC will never open a check. It can, however, make the business better prepared and reduce the risk of avoidable inaccuracies.
A reliable process should include:
- Recording all sales, including cash and online income.
- Retaining customer and supplier invoices.
- Separating personal and business transactions.
- Reconciling every bank, card and payment account.
- Reviewing unusual or high-value transactions.
- Checking VAT codes and tax treatment.
- Maintaining loan, asset and payroll records.
- Keeping calculations supporting estimates and apportionments.
- Reviewing financial reports before returns are submitted.
- Correcting errors promptly and transparently.
Good records can also demonstrate that the business took reasonable care, even where an isolated error occurred.
Records to Keep Ready
Businesses should maintain records continuously rather than trying to reconstruct them after HMRC makes contact.
A practical records file may contain:
- Copies of all submitted tax returns.
- Final annual accounts.
- Supporting tax computations.
- Complete transaction ledgers.
- Bank and payment-provider statements.
- Bank reconciliation reports.
- Sales and supplier invoice archives.
- VAT returns and control-account reconciliations.
- Payroll and CIS submissions.
- Asset registers.
- Loan statements and finance agreements.
- Explanations of unusual transactions.
- Professional advice relied upon when preparing returns.
HMRC Compliance Check Checklist
- Read every page of the HMRC correspondence.
- Confirm that the contact is genuine.
- Record all response and appeal deadlines.
- Identify the tax, period and issue being checked.
- Preserve the original records.
- Inform the relevant bookkeeper, accountant or tax adviser.
- Obtain specialist advice immediately for COP8, COP9 or suspected fraud.
- Reconcile the accounts before producing reports.
- Match each requested figure to supporting evidence.
- Prepare clear schedules and explanations.
- Keep copies of everything supplied to HMRC.
- Document telephone calls, meetings and visits.
- Disclose identified errors appropriately.
- Review any proposed tax, interest or penalties carefully.
- Protect the appeal deadline if the decision is disputed.
How Carter Bookkeeping Services Can Help
Carter Bookkeeping Services can help businesses organise, reconcile and explain the bookkeeping records required during an HMRC compliance check.
Support can include:
- Bringing bookkeeping records up to date.
- Reconciling bank, card and payment-provider accounts.
- Locating invoices, receipts and supporting documents.
- Preparing sales, expense and transaction reports.
- Reconciling VAT records to submitted returns.
- Reviewing customer and supplier balances.
- Identifying duplicated, missing or incorrectly categorised transactions.
- Explaining how bookkeeping figures were produced.
- Preparing organised records for an accountant or specialist tax adviser.
- Completing a holistic bookkeeping review to identify weaknesses in existing records and processes.
Bookkeeping support does not replace specialist tax investigation or legal representation. Where HMRC disputes the tax treatment, alleges deliberate conduct or opens a COP8 or COP9 investigation, an appropriately qualified specialist should lead the response.
Regular bookkeeping support can help ensure that records remain current, reconciled and available if HMRC asks how a return was prepared.
Frequently Asked Questions
Does an HMRC Check Mean I Have Done Something Wrong?
No. A check may concern a particular figure, repayment or apparent inconsistency. The outcome may confirm that no adjustment is required.
Should I Respond to HMRC Myself?
You can respond personally, but professional support may be valuable where the records are incomplete, the tax treatment is disputed or significant tax and penalties could be involved.
Can My Bookkeeper Speak to HMRC?
Potentially, provided the bookkeeper is appropriately authorised and the work falls within their competence and agreed services. Technical disputes and fraud investigations may require a specialist tax adviser or solicitor.
Can HMRC Visit My Business?
Yes. HMRC may request a visit to a home, business or adviser’s office. An accountant or legal adviser can attend with you.
Can HMRC Ask for Bank Statements?
HMRC may request bank statements and other financial records where they are reasonably required to check the tax position.
Will I Automatically Receive a Penalty for an Error?
No. HMRC considers why the error occurred. An inaccuracy should not attract an inaccuracy penalty where reasonable care was taken, although the underlying tax and interest may still need to be paid.
What Is the Difference Between COP8 and COP9?
COP8 is used by HMRC’s Fraud Investigation Service for certain serious or complex cases involving a possible significant loss of tax. COP9 is the civil investigation procedure used where HMRC suspects tax fraud.
Can I Appeal HMRC’s Decision?
Many tax and penalty decisions carry appeal rights. The deadline is commonly 30 days, but the relevant decision letter should be checked carefully.
How Long Does an HMRC Investigation Take?
There is no standard duration. A narrow request may be resolved quickly, while a complex investigation involving several periods, taxes or missing records can continue for much longer.
Preparation Begins Before HMRC Makes Contact
The most effective preparation for an HMRC compliance check is maintaining complete, reconciled and supportable records throughout the year.
When every reported figure can be traced back to an invoice, statement, calculation or contract, questions are easier to answer and mistakes are easier to identify.
Contact Carter Bookkeeping Services to discuss bookkeeping records, reconciliation or preparation of financial information for your accountant or tax adviser.