Once you submit a tax return, HMRC has the authority to investigate it through a compliance check. There is no obligation for HMRC to confirm that a return has been "accepted" or that no further checks will be conducted. These checks may be carried out randomly or based on a risk assessment or triggered by data analysis through HMRC’s Connect system. HMRC is now using AI powered risk targeting tools and advanced data analytics to select returns for investigation, alongside traditional risk assessment and random selection.
HMRC’s power to initiate a compliance check includes reviewing any information in the tax return, such as claims and elections, or anything that was required but not included in the return. The time limit for HMRC to begin a compliance check depends on when the return was filed. If the return was submitted on time, HMRC has one year from the end of the filing year to start a check. However, for late submissions, the time limit is extended to the quarter day following the first anniversary of the return's filing date. For example, if you file your tax return for the year 2023/24 on 5th February 2025, HMRC can open a compliance check until 30th April 2026.
Many individuals have received letters from HMRC notifying them of a compliance check. If you’ve received such a letter and want to know more, continue reading to learn what triggers an HMRC investigation, the compliance check process, and how to reduce the likelihood of a check.
What Triggers an HMRC Investigation?
HMRC uses a sophisticated data analysis system called Connect to identify taxpayers whose returns may contain errors or who may not be declaring all of their income. Connect cross references tax returns against a wide range of data sources, including bank and building society records, Land Registry data, online marketplace transactions, social media activity, credit reference data, and information received from overseas tax authorities under international exchange agreements.
Discrepancies in Tax Return
The majority of compliance checks are opened because of discrepancies in your tax return found by HMRC officers often through its Connect data matching system. Discrepancies may include failure to declare income sources, claiming reliefs and expenses they were not entitled to, entering wrong figures, etc. If the errors in the return are only minimal, HMRC may amend the return within 9 months from the filing date and send a revised tax calculation to you. On the other hand, if errors seem deliberate and suspicious, the return is likely to be investigated.
Late Filing and Late Payments
Another cause of compliance checks is the late filing and payment of taxes due. Late filing and payments may indicate careless behaviour, resulting in a potential compliance check. If you are found to be regularly filing the return and paying the taxes late after the deadline, such returns are more likely to attract an HMRC investigation.
Random Selection
As stated earlier, HMRC selects some returns for investigation on a random basis. Therefore, even where the return is filed on time, and your tax history is clean, the return may be investigated on a random basis. HMRC manual informs the employee that they should not ignore the returns chosen on random basis if they are low-risk. Returns selected at random are worked in exactly the same way as risk-based enquiries.
Unusually High International Transactions
Significant increases in income compared to previous years may also attract HMRC’s attention, particularly if there are large international transactions involved. Under international automatic exchange of information agreements, including the Common Reporting Standard (CRS), HMRC receives financial data from over 100 jurisdictions. This means that overseas bank accounts, investment income, and capital gains are increasingly visible to HMRC. Large or unusual international transactions may be flagged for further review, particularly where they are inconsistent with the taxpayer’s declared income.
For Crypto Transaction
From January 2026, UK crypto platforms must report all crypto transactions to HMRC under the Cryptoasset Reporting Framework (CARF). This data will be cross referenced with Self Assessment returns. Undisclosed crypto income or gains are increasingly likely to result in HMRC Investigation
HMRC Compliance Check Process
Initial Contact
When a compliance check has been started against a return, the HMRC officer working on the check will contact you to inform them of the compliance check. A letter, including the factsheet CC/FS1 A (About a compliance check), is sent to you, which details the reasons behind the investigation and your rights. If individuals have an accountant, the accountant can contact HMRC on their behalf and liaise to reach an agreement.
HMRC also provides an online Interactive Compliance Guidance tool, launched in April 2025, which brings together guidance, videos, and step by step support throughout the compliance check process.
Gathering Information
The second step in the investigation is information gathering. Information is gathered to understand your behaviour as it influences the penalty assessed and the level of information to be gathered and reviewed.
HMRC’s internal handbook states that the officer working on the investigation should gather and retain original records and the details of meetings with the person being enquired or their representative. Information to be gathered and retained includes:
- All records identified, produced and inspected.
- The risks identified.
- All checks applied to records seen, including document numbers where appropriate.
- All verbal rulings given and the nature and number of errors identified.
- All further records and information requested at the end of your visit.
Meeting and Interviews
During an HMRC investigation, HMRC may ask the person being inquired, inquire, to visit their home, business or an adviser’s office. The inquiree can have an accountant or legal adviser with them during a visit.
Penalty may be payable if HMRC sends you an inspection or information notice and fail to provide the information or refuse a visit, unless there is a ‘reasonable excuse’, such as:
- You’re seriously ill
- Someone close to you has died
- Due to circumstances beyond control like: fire, theft, flood, etc.
Outcome
After completing the investigation, HMRC will send a notice detailing the outcome. If you are entitled to claims or allowances that weren’t made, the officer should guide them on how to submit these.
If the return is amended during the investigation, this will be included in the final notice. If your return has been amended during the enquiry, these amendments are included in the enquiry by the officer. If the officer included your amendment in their enquiries and concluded the amendment was correct they must now give effect to it. Their closure notice will say that they have concluded that no amendment is needed to the return as a result of the enquiries.
Where an officer gives effect to your amendment, they should explain when any tax now payable or repayable is due.
The conclusion of the compliance check could result in the you either:
- Receiving a repayment if they have overpaid tax, potentially with interest on the owed amount.
- Being required to pay additional tax within 30 days if more is due.
In addition to interest, penalties may also apply. HMRC will assess this by considering:
- The reasons for any underpayment or overclaimed tax.
- Whether you informed HMRC as soon as possible.
- How cooperative you were during the investigation.
If you are facing difficulty paying, inform the officer handling the check.
If you want to know more about HMRC investigations visit our article "HMRC Nudge Letters and Investigations : Managing Tax Enquiry".
Assessment of Penalty and Possible Reduction
The first penalty HMRC will issue is an initial £300 penalty. Officers are not required to give you a 14-day warning before this penalty is assessed. If you continue failing to comply with the notice or after the initial £300 penalty, HMRC may impose daily penalties.
Daily pentalties can be up to £60 per day thereafter.
Upto £1000 if default exceeds 30 days.
Upto £3000 for each inaccuracy in document provided in response Penaties for inaccuracies in the tax return.
To receive the maximum penalty reduction, you must:
- Disclose everything you know about the issue immediately. An Unprompted disclosure will attract a greater reduction than a prompted disclosure.
- Help HMRC calculate the correct amount of tax owed.
If HMRC discovers something wrong that you weren’t aware of, to secure the maximum reduction, you should:
- Provide as much help as possible before the issue is found.
- Immediately inform the officer once it’s discovered, allow access to any requested records, and help calculate the correct tax amount.
HMRC may pursue a criminal investigation if deliberate wrongdoing is suspected, such as:
- Providing false information, either verbally or in writing.
- Fraudulently misrepresenting the amount of tax owed or claiming payments you aren’t entitled to.
Quick Look
UnPrompted disclosure: where you come forward before HMRC contacts you or before you have reason to believe HMRC has discovered the issue
To know more about this read our article on "HMRC Tax Investigation – 10 Reasons HMRC Might Audit Your Tax Return”.
What if I Disagree With the Outcome of the Compliance Check?
If you disagree with any aspect of the outcome, you should write to HMRC explaining your concerns. If HMRC makes a decision that can be appealed, they will inform you in writing and provide instructions on how to proceed. Typically, you will have three options:
- Submit new information to the officer handling the check and request a reconsideration.
- Request a review by a different HMRC officer who was not involved in the original investigation. HMRC must complete this review within 45 days (or such longer period as is agreed)
- Take your case to an independent tribunal to hear your appeal and make a decision.
- You may also wish to consider HMRC’s Alternative Dispute Resolution (ADR) service, which uses a trained mediator to help resolve disputes without the need for a formal tribunal hearing
You must act within 30 days of receiving HMRC's letter. If you miss this deadline, you may apply for a late appeal, but you will need to demonstrate a reasonable excuse for the delay
How to Authorise an Accountant to Deal with HMRC?
You need to submit a Comp1 form to authorise an account to handle the compliance check on your behalf. This gives the accountants temporary authorisation to deal with HMRC regarding the compliance check. If you already have an accountant who has formal authorisation, a Comp1 form is not necessary.
Unlike a permanent formal authorisation, the temporary authorisation is only known to the HMRC staff working on the compliance check and no one else. It automatically extends to cover any additional tax periods or taxes that HMRC brings within the scope of the check. The authorisation ends when the compliance check is closed and any related appeals have been resolved.
How to Reduce the Chances of Being Inspected by HMRC?
As stated previously, it is not possible to completely eliminate the chances of being investigated by HMRC because of the random selection process. However, you can certainly reduce the chances of inspection. The following are some of the ways to do so.
- Always submit your tax returns on time.
- Keep clear and comprehensive records of all income, expenses, and supporting documents for at least six years.
- Consider using professional accounting software or Making Tax Digital compatible software to reduce the risk of errors
- If you receive a nudge letter or One to Many campaign email from HMRC, do not ignore it. Review your affairs and make a voluntary disclosure if appropriate
- Be aware that income earned through online platforms (such as eBay, Etsy, Airbnb, and similar marketplaces) is now reported to HMRC by those platforms, so ensure all such income is declared.
- If you have overseas bank accounts or investments, ensure these are correctly reported on your tax return, as HMRC receives data from over 100 countries under automatic exchange agreements
- Always make sure your returns are accurate and include all income sources.
- If there are massive changes in turnover or profits in the return, explain the reasons behind these in the return.
Conclusion
Stay informed and engaged if you're undergoing an HMRC compliance check. Understanding the triggers, the process, and potential penalties will help you navigate the situation confidently. While it's impossible to completely avoid the possibility of a check, adhering to good tax practices and promptly addressing any discrepancies will mitigate risks. Should a disagreement arise with HMRC’s findings, there are clear steps to appeal and resolve the matter.
Ultimately, compliance checks underscore the importance of accuracy and transparency in tax reporting. By taking proactive steps, you can protect your financial standing and avoid long-term complications.
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