Do I need to pay additional penalties if I already paid a late fee?

Yes, late filing penalties and late payment penalties are separate. For Self Assessment, you face an automatic £100 penalty for filing one day late, even if you owe no tax. Further penalties accrue if you remain late. Separately, if you pay your tax late, HMRC charges interest and additional penalties based on how late the payment is (e.g., 5% of the unpaid tax at 30 days, six months, and twelve months late). The late payment interest rate is currently 8.25% per year (from 28 May 2025).

What if I think HMRC's demand is an error?

If you believe HMRC's demand for payment or a penalty is incorrect, you should contact them or, ideally, have your accountant do so on your behalf. Provide clear reasons and any supporting evidence to explain why you think there's an error. It's important to address this promptly.

How long does an investigation take?

The duration of an HMRC investigation can vary significantly. Simple aspect enquiries might be resolved relatively quickly, while more complex or full enquiries, especially those involving suspected fraud, can take months or even years.

What records do I need to keep?

HMRC requires self-employed individuals and businesses to keep adequate records of all income and expenses. This includes sales invoices, receipts for all business expenses, bank statements, and VAT records if registered. For Self Assessment, you must keep records for at least five years after the 31 January filing deadline of the relevant tax year. Limited companies generally need to keep records for six years from the end of the relevant financial year.

Can I appeal HMRC's decision?

Yes, if you disagree with the outcome of an HMRC investigation or a penalty, you generally have the right to appeal. There are strict time limits, usually 30 days from the date of the decision or penalty notice, to make an appeal to HMRC. Your accountant can help you prepare and submit a robust appeal.

HMRC investigation or compliance check: what to do

What is an HMRC compliance check or investigation?

HMRC has the right to check your tax affairs at any point to ensure you're paying the correct amount of tax and receiving the right allowances and reliefs. These checks are often referred to as "compliance checks" or "tax enquiries".

They can range from a simple query about a specific item on your tax return to a full review of your business or personal finances. While the terms are sometimes used interchangeably, a "compliance check" is generally a formal review of your records and returns, often routine and civil. An "investigation" can imply a deeper look, especially if HMRC suspects deliberate dishonesty or fraud.

Why HMRC might contact you

HMRC uses a mix of risk-based intelligence and random sampling to select cases. Common triggers include:

Discrepancies in your tax returns: For example, large or unusual deductions, significant changes in income or expenses, or figures that don't match industry norms.
Late or missed tax submissions: Especially if this happens repeatedly.
Third-party information: HMRC may receive information from other sources, such as banks or other government agencies.
Random selection: Even if your affairs are in perfect order, you could still be selected for a check.
Specific claims: Such as R&D tax credits or capital allowances.

Your first steps when contacted by HMRC

If you receive a letter or phone call from HMRC about a compliance check or investigation, it's natural to feel worried. However, many investigations are resolved without significant penalties, especially if you have kept thorough records.

Don't panic: Stay calm and remember that this is a process that can be managed.
Read the notification carefully: Understand exactly what HMRC wants to check, the specific tax year(s) involved, and the deadline for your response.
Identify the type of communication: Is it a routine compliance check, a request for more information, or something more serious like a fraud investigation? This will influence your next steps.
Do not ignore it: HMRC correspondence requires a response. Ignoring it or missing deadlines can lead to additional scrutiny or penalties.
Gather relevant documents: Start collecting all records related to the period and taxes HMRC is interested in. This might include bank statements, invoices, receipts, payroll records, and previous tax returns.
Contact your accountant immediately: Your accountant can help you understand the letter, advise on the best course of action, and represent you in communications with HMRC. They can ensure queries are answered accurately and professionally.

The investigation process

Once you've been notified, the process typically follows these stages:

Information requests: HMRC will ask for specific documents and explanations within set timeframes. They have extensive powers to demand records, including accounts, contracts, invoices, and bank statements.
Review and follow-up questions: HMRC will review the information you provide and may have further questions or request additional documentation.
Meetings: In some cases, HMRC may request a meeting with you or your accountant to discuss your tax affairs. While you generally don't have to meet them if you don't want to, your accountant can advise on whether a meeting is beneficial. In more serious cases, interviews may take place.
Outcome: After reviewing all information, HMRC will inform you of their conclusions. This could result in:
No change to your tax position.
Adjustments to your tax bill, meaning you owe more or are due a refund.
Penalties, if errors or non-compliance are found.
In serious cases, escalation to fraud investigation services.

Throughout the process, it's crucial to cooperate fully, respond promptly, and provide accurate information.

Common mistakes

Ignoring HMRC communications: This is one of the worst things you can do, as it can lead to further penalties and a more serious view from HMRC.
Delaying your response: Always adhere to deadlines. If you need more time, ask your accountant to request an extension from HMRC.
Providing incomplete or inaccurate information: Ensure all information shared is truthful and fully supported by your records.
Not seeking professional advice: Dealing with HMRC can be complex. An experienced accountant can navigate the process, protect your interests, and potentially reduce the impact of any findings.
Failing to keep adequate records: Poor record-keeping can lead to penalties and make it difficult to defend your tax position.

Frequently asked questions

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