How to Handle an HMRC Audit - A Step-by-Step Guide

A letter from HMRC requesting information about your tax return is unsettling. For most people, it arrives without warning and creates immediate anxiety.

The good news is that most HMRC inquiries are routine. Many are triggered by simple anomalies rather than any suspicion of wrongdoing. With the right preparation and professional support, they can be resolved efficiently.

Why HMRC Opens Inquiries

HMRC opens inquiries for a range of reasons. Some are entirely random - a proportion of returns is reviewed regardless of content. Others are triggered by specific signals:

• Reported income appears inconsistent with known lifestyle or assets
• Figures differ significantly from previous years without explanation
• Discrepancies exist between your return and third-party data held by HMRC (from banks, letting agents, or overseas authorities)
• You have overseas income or assets that have come to HMRC's attention

HMRC has twelve months from the filing deadline to open a routine inquiry. If fraud or deliberate error is suspected, they can go back up to twenty years.

Types of HMRC Inquiry

Aspect Inquiry The most common type. HMRC focuses on a specific part of your return - for example, a particular income source or expense claim. It does not mean your entire return is under review.

Full Inquiry HMRC examines the entire return. Less common, and typically indicates broader concern about its accuracy.

Code of Practice 9 (COP9) A formal procedure used where HMRC suspects serious tax fraud. Relatively rare and involves a more intensive process.

What to Do When You Receive a Notice

Step 1: Read the Notice Carefully Understand exactly what HMRC is asking for. The notice will specify the tax year under review and the items being questioned. A request for documentation is not a finding of wrongdoing.

Step 2: Do Not Ignore It Every notice has a response deadline. Missing it gives HMRC grounds to issue a determination of your liability based on their own estimate. Respond within the timeframe, even if only to acknowledge receipt.

Step 3: Contact a Tax Specialist Immediately If the inquiry covers anything beyond a single, straightforward document request, get professional help straight away. A specialist experienced in HMRC inquiries can assess the situation quickly, handle all communication with HMRC, and reduce the risk of the inquiry expanding.

Step 4: Gather Your Records Locate all relevant documentation - bank statements, receipts, invoices, payslips, rental agreements, and any previous HMRC correspondence. Organised, complete records are your most effective tool.

Step 5: Respond Accurately and Completely Provide exactly what has been asked for - no more, no less. Volunteering additional information beyond the scope of the inquiry can inadvertently expand it.

Common Triggers for HMRC Inquiries

• Significant year-on-year changes in income or expenses
• Self-employment income inconsistent with the nature of the business
• Rental income absent or understated
• High expense claims relative to income
• Overseas income or assets not declared
• Discrepancies between your return and data held by HMRC

How Long Does It Take?

Routine inquiries often conclude within twelve months with prompt responses and good records. Complex cases take longer.

HMRC must close an inquiry once satisfied. If you believe HMRC is unreasonably prolonging it, you can apply to the First-tier Tribunal to direct them to close it.

Penalties

If an inquiry reveals errors or underpayment, HMRC will charge penalties. The level depends on the nature of the error. If HMRC determines the error was a genuine mistake where reasonable care was taken, no penalty applies. Careless errors attract a penalty of between 0% and 30% of the unpaid tax. Deliberate errors carry penalties of between 20% and 70%. Deliberate errors that were also concealed can attract penalties of between 30% and 100% of the unpaid tax.

Penalties are reduced for unprompted disclosure and for cooperation during the inquiry.

Prevention Is Better Than Resolution

File accurate returns every year. Keep complete records. Get professional advice when your situation is complex.

If you discover an error in a previously filed return, correct it promptly. You can amend a Self Assessment return within twelve months of the 31 January filing deadline. Voluntary correction before HMRC contacts you is almost always treated more favourably than an error discovered during an inquiry.