HMRC Tax Enquiry: What to Do When HMRC Investigates You

Receiving a letter from HMRC opening an enquiry into your tax return can be one of the most stressful experiences for any taxpayer. Whether you're an individual, a small business owner, or a company director, an HMRC enquiry can be time-consuming, costly, and — if handled poorly — result in significant additional tax, interest, and penalties.

This complete guide explains what to do when HMRC opens an enquiry, the different types of enquiries, your rights as a taxpayer, and how to achieve the best possible outcome.

Types of HMRC Enquiries

HMRC has several powers to investigate taxpayers. Understanding which type of enquiry you're facing is the first step in determining your response.

Self-Assessment Enquiries

A self-assessment enquiry is opened under TMA 1970, Section 9A. HMRC can open an enquiry into a self-assessment return within 12 months of the filing deadline (for returns filed on time). There are two types:

1. Aspect enquiry: HMRC investigates one or more specific aspects of the return (e.g., business expenses, capital gains, rental income). This is the most common type.

2. Full enquiry: HMRC investigates the entire return, typically because they suspect significant errors or omissions. This is more serious and can be extensive.

HMRC does not need to give a reason for opening an enquiry — they can open one randomly or based on risk assessment.

Code of Practice 8 (COP8)

COP8 is used when HMRC suspects tax avoidance (not fraud). It involves a formal investigation into complex tax planning arrangements. COP8 cases are handled by HMRC's Specialist Investigations team and can be lengthy and complex.

Code of Practice 9 (COP9)

COP9 is the most serious type of investigation. It's used when HMRC suspects serious fraud. Under COP9, the taxpayer is offered a Contractual Disclosure Facility (CDF), which gives them the opportunity to make a full disclosure of all tax irregularities in exchange for immunity from criminal prosecution (but not from penalties).

Failing to make a full and complete disclosure under COP9 can result in criminal prosecution.

Employer Compliance Reviews

HMRC can review an employer's PAYE and NIC compliance, checking whether the employer is correctly operating PAYE, reporting benefits, and paying the right amount of NIC.

VAT Investigations

HMRC can investigate VAT returns, checking whether the business is correctly accounting for VAT, recovering input tax, and classifying supplies.

The Enquiry Process

Step 1: The Opening Letter

The enquiry begins with a letter from HMRC, stating that an enquiry has been opened and what information HMRC requires. The letter will specify:

• The tax year(s) under enquiry
• The specific aspects of the return being investigated (for aspect enquiries)
• The information and documents required
• The deadline for providing the information (typically 30 days)

Step 2: Providing Information

You must provide the information and documents requested by HMRC. However, you should:

• Check the scope: Ensure that HMRC's request is reasonable and relevant to the tax position under enquiry. HMRC cannot make 'fishing expeditions.'

• Claim exemptions: Certain documents are exempt from disclosure, including legally privileged documents (communications with a lawyer for legal advice).

• Organise the information: Provide the information in an organized manner, with clear references and explanations. This demonstrates cooperation and helps HMRC understand your position.

• Seek specialist advice: If you haven't already, engage a specialist tax adviser at this stage. An experienced adviser can manage the enquiry, liaise with HMRC, and ensure your rights are protected.

Step 3: HMRC's Review

HMRC reviews the information provided and may request additional information or clarification. They may also visit your business premises (with your agreement) or interview you (with your agreement).

Step 4: HMRC's Findings

After reviewing the information, HMRC will either:

• Close the enquiry with no adjustments: If HMRC is satisfied with your return, the enquiry is closed with a closure notice.

• Propose adjustments: If HMRC believes that the return is incorrect, they will propose adjustments to the tax due, along with any interest and penalties.

Step 5: Closure

The enquiry is closed with a closure notice. If adjustments are proposed, you can:

• Accept the adjustments: Agree to the additional tax, interest, and penalties.

• Request a statutory review: Ask HMRC to review the adjustments internally (a different HMRC officer reviews the case).

• Appeal to the First-tier Tribunal: If you disagree with the adjustments, you can appeal to the First-tier Tribunal (Tax Chamber).

Your Rights as a Taxpayer

Right to Professional Representation

You have the right to be represented by a professional adviser throughout the enquiry. You do not have to deal with HMRC directly — your adviser can handle all communication, meetings, and negotiations.

Right to Information

HMRC must tell you what information they require and why. You can ask HMRC to explain the scope of the enquiry and the specific issues they are investigating.

Right to Challenge

You can challenge HMRC's findings, including:

• Factual issues: If HMRC has the facts wrong, you can provide evidence to correct them.

• Legal issues: If HMRC has misinterpreted the law, you can present legal arguments.

• Penalties: If HMRC has imposed penalties, you can challenge the penalty amount or the behaviour categorisation (innocent, careless, deliberate).

Right to Appeal

If you disagree with HMRC's adjustments, you have the right to appeal to the First-tier Tribunal. The Tribunal is independent of HMRC and will make a binding decision.

Penalties and Behaviour

Penalties for tax errors are based on the taxpayer's behaviour:

Innocent Error

If you took reasonable care but made a mistake, there is no penalty. The tax and interest are still due, but no penalty is charged.

Careless Behaviour

If you did not take reasonable care (e.g., failed to keep adequate records, did not check the return), the penalty is 0-30% of the additional tax.

Deliberate Behaviour

If you deliberately understated your tax (e.g., knowingly omitted income), the penalty is 20-70% (prompted disclosure) or 20-100% (unprompted disclosure).

Deliberate and Concealed

If you deliberately understated your tax and took steps to conceal it, the penalty is 35-100% of the additional tax.

Penalty Reductions

Penalties are reduced for the quality of the disclosure:

• Telling: Telling HMRC about the error
• Helping: Helping HMRC understand the error
• Giving access: Providing access to documents and information

A full, unprompted disclosure can reduce the penalty to the minimum of the range.

How to Handle an HMRC Enquiry

Do's

1. Respond promptly: HMRC sets deadlines for providing information. Missing deadlines can result in penalties and escalate the enquiry.

2. Seek specialist advice early: Engage a specialist tax adviser as soon as you receive the enquiry letter. Early advice can help manage the enquiry and achieve a better outcome.

3. Be cooperative: Cooperation is key. HMRC is more likely to be reasonable with a cooperative taxpayer, and cooperation can reduce penalties.

4. Keep records: Keep detailed records of all communication with HMRC, including dates, times, and the content of conversations.

5. Understand your rights: Know your rights — you don't have to answer every question, and you can challenge unreasonable requests.

Don'ts

1. Don't panic: An enquiry doesn't mean you've done something wrong. Many enquiries are opened randomly or based on risk assessment.

2. Don't go it alone: HMRC has significant resources and experience. A specialist adviser levels the playing field.

3. Don't provide more than requested: While cooperation is important, providing more information than requested can give HMRC additional leads and prolong the enquiry.

4. Don't lie or conceal information: If HMRC discovers that you have lied or concealed information, the consequences can be severe — including higher penalties and potential criminal prosecution.

5. Don't ignore the enquiry: Ignoring an enquiry letter will not make it go away. HMRC can make determinations (assessing tax based on their best judgment) and impose penalties for non-cooperation.

Alternative Dispute Resolution (ADR)

If the enquiry is not progressing or communication has broken down, you can use HMRC's Alternative Dispute Resolution (ADR) service. ADR uses a neutral mediator to facilitate a resolution between you and HMRC. It's free, confidential, and does not affect your right to appeal to the Tribunal.

ADR is particularly effective for:

• Disputes involving factual issues
• Communication breakdowns
• Cases where a negotiated settlement is preferable to a Tribunal hearing

How Newshams Can Help

At Newshams Tax Advisers, we have extensive experience handling HMRC enquiries. Our approach includes:

• Managing the enquiry from start to finish
• Liaising with HMRC on your behalf
• Reviewing the information HMRC has requested and ensuring it's reasonable
• Preparing technical arguments in response to HMRC's findings
• Negotiating settlements with HMRC
• Representing you at the First-tier Tribunal if necessary
• Using ADR where appropriate

Book a consultation to discuss your HMRC enquiry, or contact us for an informal discussion.

Frequently Asked Questions

How long does an HMRC enquiry last? An aspect enquiry typically lasts 3-6 months. A full enquiry can last 12-18 months or longer. COP8 and COP9 investigations can last 2-3 years.

Do I need a tax adviser for an HMRC enquiry? While not legally required, a specialist tax adviser is strongly recommended. HMRC has significant resources and experience, and an adviser can manage the enquiry, protect your rights, and achieve a better outcome.

What is a statutory review? A statutory review is an internal HMRC review of the adjustments proposed by the enquiry officer. It's conducted by a different HMRC officer. You can request a statutory review within 30 days of the enquiry closure.

What happens if I disagree with HMRC's findings? You can appeal to the First-tier Tribunal (Tax Chamber) within 30 days of the closure notice. The Tribunal is independent of HMRC and will make a binding decision.

Can I go to prison for a tax error? No. An honest mistake (innocent error) or even a careless error does not result in criminal prosecution. Criminal prosecution is reserved for deliberate tax fraud (COP9 cases). If you cooperate and make a full disclosure, criminal prosecution is unlikely.