HMRC Penalties & Investigations

The letter announcing an HMRC investigation does not need to be dramatic to be consequential. “We have opened a compliance check into your Corporation Tax return for the year ended…” starts a process that can run for six months, eighteen months, or, where COP9 is invoked, several years, with penalty exposure that moves sharply with the director’s behaviour inside the enquiry.

This page sets out the full HMRC penalty architecture across all tax types, the different categories of investigation, the behaviour tiers that determine the penalty amount, the rights and responsibilities of directors during the process, and the specific routes to disputing or appealing the outcome.

What HMRC Investigations Are and How They Start

HMRC investigates UK taxpayers to ensure correct tax has been paid. The investigation framework splits into four main categories, each governed by a specific Code of Practice:

• Compliance check (COP1), routine review of returns and records. Most common category.
• Code of Practice 8 (COP8), serious non-fraud enquiry into complex tax planning.
• Code of Practice 9 (COP9), civil investigation where HMRC suspects tax fraud. The Contractual Disclosure Facility is offered.
• Criminal investigation, conducted by HMRC’s Fraud Investigation Service or referred to the Crown Prosecution Service.

Penalties apply across all four, but the scale, the reduction mechanisms, and the procedural routes differ significantly between them. Knowing which category your investigation falls into determines your available responses.

Common Reasons HMRC Opens an Investigation

Triggers fall into a predictable list:

• Risk-based selection from filed returns, sharp year-on-year changes, industry-benchmark anomalies, unusual expense ratios.
• Third-party information, bank reporting under the Common Reporting Standard, supplier VAT returns that do not reconcile, former-employee disclosures.
• Marketed tax-avoidance scheme participation, disclosable under the DOTAS regime, automatically triggering review.
• Random selection, a small proportion of cases are chosen without risk basis for compliance baseline purposes.
• Follow-up on a previous investigation, where issues arose in a prior year, HMRC routinely extends the enquiry to adjacent years.

Overview of HMRC Penalties by Behaviour and Tax Type

The statutory penalty framework applies across all major tax types under Schedule 24 of the Finance Act 2007 (inaccuracies) and Schedule 41 (failure to notify).

Behaviour	Prompted max	Unprompted max	Prompted min	Unprompted min
Reasonable care	0%	0%	0%	0%
Careless	30%	30%	15%	0%
Deliberate (not concealed)	70%	70%	35%	20%
Deliberate and concealed	100%	100%	50%	30%

Separate penalty regimes apply to late filing (Schedule 55 of the Finance Act 2009), late payment (Schedule 56), and specific anti-avoidance instruments (Accelerated Payment Notices and Follower Notices under the Finance Act 2014).

Interest on unpaid tax is separate again, currently at 7.75% on late payment (Bank of England base rate + 4%).

The HMRC Investigation Process, Start to Finish

A typical compliance check or COP8 investigation runs through the following stages:

1. Opening notice, HMRC writes to the taxpayer specifying the tax year under enquiry and the information requested.
2. Information request, HMRC issues formal notices (Schedule 36, Finance Act 2008) requiring production of specific documents, with deadlines and penalties for non-compliance.
3. Enquiry meetings, interviews with directors, accountants, or key witnesses. Under COP1, meetings are voluntary; under COP9, specific meetings are part of the disclosure process.
4. Draft findings, HMRC sets out its position, including the behaviour category proposed and the calculated penalty.
5. Negotiation and settlement, the taxpayer can contest the behaviour category, the potential lost revenue calculation, or the quality of disclosure.
6. Closure notice and amendments, HMRC issues formal closure under section 28A of the Taxes Management Act 1970, setting the additional tax, interest, and penalty.
7. Appeal to First-tier Tribunal where disputes remain. Must be filed within 30 days of the decision.

Timescales vary. A simple compliance check can close in 3–6 months. A complex multi-year COP9 investigation typically runs 18 months to 3 years. In our experience, the penalty is not set when the letter arrives; it is set by what the director does in the months that follow.

The directors we see settle lowest are those who treat the opening notice as the beginning of a negotiation, not the end of one.

Your Rights and Responsibilities During an HMRC Investigation

HMRC’s powers are broad but not unlimited. The taxpayer’s rights:

• Right to representation by a qualified tax adviser or solicitor throughout.
• Right to written reasons for any formal request or assessment.
• Right to decline voluntary meetings (under COP1); compulsion requires formal notices under Schedule 36.
• Right to appeal formal assessments to the First-tier Tribunal within 30 days.
• Right to statutory review (an internal HMRC review before tribunal) where requested within 30 days.
• Right to privilege over legal advice from solicitors (legal professional privilege) and, in narrower form, from tax advisers.

The responsibilities:

• Obligation to produce documents required under formal Schedule 36 notices. Non-production triggers penalties of £300 plus £60 per day.
• Obligation not to destroy records relevant to the enquiry. Destruction can support increased penalty categories or criminal referral.
• Obligation to answer questions truthfully, particularly under COP9 disclosure procedures.

Disputing or Appealing HMRC Penalties

Where the penalty is disputed, three routes:

• Direct appeal to HMRC within 30 days of the penalty notice. Grounds include reasonable excuse, incorrect behaviour category, or incorrect calculation of potential lost revenue.
• Statutory review, internal HMRC review by an officer not involved in the original decision. Usually takes 45 days.
• First-tier Tribunal (Tax Chamber), independent judicial body. Appeal within 30 days of HMRC’s decision or review conclusion.

The most commonly successful appeal ground is “reasonable excuse”, unforeseen events outside your control (illness, bereavement, third-party failure, catastrophic system failure). The bar is real; generic business pressure, staff turnover, and “we forgot” do not meet it.

The second most common ground is behaviour-category dispute, contesting HMRC’s categorisation of your error as “deliberate” where “careless” is the correct finding, with substantial penalty-band differences that can protect your settlement position significantly.

When an HMRC Investigation Signals Wider Distress

HMRC investigations frequently coincide with broader business distress, for understandable reasons: the conditions that produce compliance errors (stretched bookkeeping, cash-flow pressure, director overload) are the same conditions that produce insolvency risk. In our practice, we see both arriving together more often than separately.

The signals to watch during an investigation:

• Accumulating HMRC arrears while the enquiry is ongoing, compounds penalty exposure and signals cash-flow insolvency.
• TTP breach or refusal during the enquiry, see What Happens If HMRC Rejects Your Time to Pay.
• Director’s Loan Account drift, often exposed during HMRC enquiries, with section 455 Corporation Tax Act 2010 exposure at 33.75% on outstanding balances.
• Parallel criminal investigation, see HMRC Criminal Investigations.

Where your investigation outcome will produce a tax bill the company cannot realistically pay, licensed IP involvement is sensible well before the closure notice. Our team tests viability and models formal-process alternatives where your liability exceeds operating cash.

Your Next Step on an HMRC Investigation

The first call on any HMRC investigation letter is to a qualified tax specialist or an accountant with enquiry experience. Handling your enquiry without representation, particularly where behaviour category will be at issue, costs more in penalties than the specialist fee in almost every case.

The second call, where the potential tax bill threatens your business viability, is to a licensed insolvency practitioner.

Our licensed IPs can assess the cash-flow impact of your likely settlement, model formal-process alternatives, and handle the HMRC Debt Management conversation in parallel with the tax specialist handling your enquiry. Call us free on 0800 074 6757 for confidential advice.

FAQs on HMRC Penalties and Investigations