An HMRC compliance check is usually a simple administrative check that you’re paying the correct amount of tax or receiving the right allowances and reliefs. Given the sheer volume of information the exchequer has to process, errors are a normal part of business, and a compliance check is a way HMRC can gain clarity.
However, in some instances, compliance checks may indicate:
Suspicions of tax evasion
Doubts about the truthfulness of submitted information
Our Key Takeaways:
Most checks are routine – don’t panic
Be ready to provide accurate documentation
If HMRC has serious concerns, they’ll let you know
An HMRC compliance check is an official review of your tax situation[1]Trusted Source – GOV.UK – HMRC compliance checks: help and support. Its purpose is to verify that you’re paying the correct amount of tax and claiming appropriate allowances and reliefs.
Compliance checks/enquiries are typically routine examinations.
Investigations are more in-depth and often relate to suspected serious non-compliance.
Inspections and assurance visits usually involve HMRC officers visiting your premises.
What Triggers a Compliance Check by HMRC?
HMRC selects companies for compliance checks based on a variety of factors. Some of the most common triggers include:
Random selection
HMRC randomly selects a certain number of companies for compliance checks each year as part of their routine monitoring process.
Inconsistencies in tax returns
If your company’s tax returns contain discrepancies or inconsistencies, such as significant changes in income or expenses from one year to the next, it may trigger a compliance check.
Sector-specific risks
HMRC may target companies in specific sectors that are known to have higher risks of tax non-compliance, such as the construction industry or the hospitality sector.
Tip-offs and third-party information
HMRC may receive information from third parties, such as suppliers, customers, or employees, that suggests a company is not complying with tax laws.
Previous non-compliance
If your company has a history of tax non-compliance, such as late filing of returns or payment of taxes, it may increase the likelihood of a compliance check.
Large or complex transactions
Companies with unusually large or complex financial transactions may be subject to additional scrutiny from HMRC.
In most cases, wrongly entered figures or sudden shifts in claim amounts prompt the Compliance Team to examine the situation more closely. An obvious scenario would be when a business with a significant turnover only declares a small amount of tax. The Compliance Team then steps in to assess what wrongdoing, if any, has taken place and what measures may be necessary to follow up.
What Can HMRC check?
Areas of interest may be:
Accounts and tax calculations
Your previous tax returns (both personal and company)
PAYE Records and Returns
Can you Refuse a Compliance Check?
The only reasons for refusing a visit by HMRC to discuss compliance matters would be in situations where you have suffered a bereavement or are facing serious health issues.
It is your right to contact the office that sent you the compliance letter, but postponement is the only outcome you can hope for.
How Long Will a Compliance Check Last?
The duration of an HMRC compliance check varies significantly, depending on your company’s specific circumstances.
If HMRC finds that your company has underpaid taxes, you may be subject to financial penalties in addition to being required to pay the outstanding tax balance.
Penalties can range from a percentage of the underpaid tax to fixed amounts, depending on the nature of the non-compliance. For example, if HMRC determines that the underpayment was due to careless or deliberate behaviour, the penalties will be higher than if it was an honest mistake[3]Trusted Source – GOV.UK – Penalties: an overview.
Behaviour
Disclosure by Taxpayer
Penalty Range
Careless
Unprompted
0% to 30%
Careless
Prompted
15% to 30%
Deliberate but not concealed
Unprompted
20% to 70%
Deliberate but not concealed
Prompted
35% to 70%
Deliberate and concealed
Unprompted
30% to 100%
Deliberate and concealed
Prompted
50% to 100%
In cases of deliberate non-compliance or attempts to conceal information, penalties can be as high as 100% of the underpaid tax, effectively doubling your tax liability.
In more serious cases involving significant fraud or tax evasion, HMRC may pursue criminal charges, which can result in fines and even imprisonment for those responsible. Directors should be aware that they can be held personally liable for company tax debts in certain circumstances, such as when they knew or ought to have known about the non-compliance.
It’s crucial to note that cooperating with HMRC during a compliance check and taking swift action to rectify any non-compliance can help mitigate potential penalties. Our advice is to keep an open line of communication and to seek third-party counsel if you feel the situation indicates a deeper financial problem in your company.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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