HMRC Compliance Checks: What to Do If Your Trade Business Is Investigated (UK Guide)

What Is a Compliance Check?

A compliance check is HMRC's way of checking that the right amount of tax has been paid. "Compliance check" is the modern term — you may also hear "enquiry", "tax enquiry" or "investigation", and people use them loosely to mean the same thing. They range hugely in scope. At one end is a quick query about a single figure on your return — an aspect check. At the other is a full enquiry into your entire tax return, where HMRC examines every part of your income and expenses for the year.

The key thing to understand is that being checked does not mean HMRC believes you have done something wrong. A proportion of checks are random, and many are opened simply because a figure looked unusual and HMRC wants to understand why. Treat it as a request for information, not a verdict.

The Types of Compliance Check

Not every check is the same, and knowing which type you're facing tells you how seriously to take it and whether you need professional help.

Aspect (single issue) check

The most common and least serious. HMRC questions one specific item — for example a large repair claimed as a revenue expense, a round-sum motor expense, or a CIS deduction that doesn't match their records. It is usually resolved quickly once you provide an explanation and supporting documents.

Full enquiry

HMRC reviews the whole tax return — all income, all expenses, the lot. This is more involved and takes longer. It is often opened where the overall picture looks out of line rather than one figure, or where an aspect check raises wider concerns.

Cross-tax check

HMRC looks across more than one tax at once — for example income tax or corporation tax alongside VAT and PAYE. This is increasingly common because HMRC's systems join up data, and inconsistencies between your VAT returns and your profit figures are easy for them to spot.

Code of Practice 8 (COP8) — avoidance

Used where HMRC suspects significant tax has been avoided through arrangements or schemes, but does not suspect fraud. It is a serious specialist investigation. If you receive a COP8 notice you should appoint a qualified adviser immediately.

Code of Practice 9 (COP9) — suspected serious fraud

The most serious civil investigation. HMRC offers the Contractual Disclosure Facility (CDF): you are given the chance to make a full disclosure of any deliberate behaviour in exchange for HMRC not pursuing a criminal prosecution for the matters disclosed. The deadlines are strict and the stakes are high. Do not respond to a COP9 letter without specialist tax-investigation representation.

How a Check Starts

You almost always find out by letter. HMRC writes to you (and your accountant, if you have authorised one) telling you they are opening a check, what it covers, and usually attaching an information notice listing the records and documents they want to see. There is normally a deadline — commonly 30 to 40 days — to respond.

For self assessment, HMRC generally has to open an enquiry within the enquiry window: 12 months from the date you filed the return (if filed on time). So a 2024/25 return filed in January 2026 can normally be enquired into up to January 2027. They can go back further than that only in specific circumstances — for example a "discovery" where information later comes to light, which carries its own longer time limits (see below).

What Triggers a Check on a Trade Business?

HMRC does not pick at random as often as people think. Most checks are driven by data. Their Connect system cross-references information from banks, the Land Registry, online marketplaces, card processors, the DVLA and many other sources to flag returns that don't add up. Common triggers for trades include:

• Cash-heavy trades: sectors with lots of cash work — building, decorating, mechanics, hairdressing — get more attention because cash is easier to under-declare.
• Margins out of line with the sector: if your gross profit percentage is well below what HMRC expects for your trade, that's a flag.
• Big year-on-year swings: turnover or profit that jumps or drops sharply without explanation invites a question.
• Undeclared income flagged by Connect: bank deposits, marketplace sales or third-party payments that don't match declared income.
• CIS mismatches: Construction Industry Scheme deductions reported by your contractors that don't reconcile with what you've claimed.
• Third-party data: information from suppliers, customers, tip-offs or other taxpayers' returns.
• Random selection: a small percentage of checks genuinely are random, to keep the system honest.

Your Rights and How to Handle It

How you respond matters. The single biggest mistake is ignoring the letter — deadlines pass, penalties for non-cooperation rack up, and HMRC may estimate your tax for you. Here is how to handle a check properly:

• Don't ignore it. Acknowledge the letter and meet the deadline, or ask for more time in writing if you genuinely need it. HMRC will usually grant a reasonable extension if you ask before the deadline.
• Check the notice is valid. Confirm it relates to a year that is still in time, and read exactly what is being asked.
• Know what HMRC can legally ask for. They can require your statutory records (the records you're legally required to keep for tax). Other documents can only be demanded if they are reasonably required to check your tax position — you can challenge requests that go beyond that.
• Consider appointing an accountant or tax adviser. For anything beyond a simple aspect query, professional representation usually pays for itself by keeping the scope tight and the tone right.
• Keep communication factual and in writing. Answer what is asked, don't volunteer speculation, and keep a record of everything you send. Avoid off-the-cuff phone explanations.
• Meet deadlines or ask for more time. Cooperation reduces penalties; delay and obstruction increase them.

What HMRC Can Ask For — and Meetings

Typically HMRC will ask to see your business records: invoices, sales records, purchase receipts, mileage logs, bank statements (business and sometimes personal), and your bookkeeping. For statutory records they have a clear legal right; for anything else the test is whether it is reasonably required to check your tax. If a request feels disproportionate, you (or your adviser) can push back and ask why it is needed.

HMRC often suggests a face-to-face meeting. For a routine compliance check you usually do not have to attend a meeting — you can decline and deal with everything in writing, which many advisers prefer because it keeps the record clear and avoids misremembered answers. (COP9 is different and is best handled with specialist guidance throughout.)

Possible Outcomes

A compliance check can end in several ways:

• No change: HMRC accepts your return as filed and closes the check. This is a very common outcome.
• Additional tax plus interest: if tax was underpaid, you pay the difference plus interest from the original due date.
• Tax, interest and a penalty: where there was an error in your favour, a penalty may be added on top.

Penalties are based on behaviour and on whether the disclosure was prompted (you only owned up after HMRC came knocking) or unprompted (you told them before they raised it). The worse the behaviour and the more prompted the disclosure, the higher the penalty. Broadly:

• Reasonable care taken (a genuine mistake): generally no penalty.
• Careless: a lower band of penalty, reduced for unprompted disclosure and cooperation.
• Deliberate: a much higher band.
• Deliberate and concealed: the highest penalties, and potential publication of your details.

How Far Back Can HMRC Go? (Time Limits)

The number of years HMRC can assess depends on the behaviour behind any error:

• 4 years where reasonable care was taken (an innocent error).
• 6 years where the error was careless.
• 20 years where the behaviour was deliberate (or in certain other serious cases, such as a failure to notify chargeability).

This is why behaviour matters so much: it drives both the penalty rate and how many years are on the table.

How to Reduce Penalties

Penalties can be substantially reduced by the quality of your cooperation. HMRC gives reductions for "telling, helping and giving access": telling them about the problem promptly, helping them quantify it, and giving access to the records they need. In practice that means:

• Disclose fully and early rather than drip-feeding information.
• Make an unprompted disclosure if you spot an error before HMRC does — the penalty range is far lower.
• Cooperate with reasonable requests and meet deadlines.
• Be honest about behaviour — trying to dress up a deliberate error as careless rarely survives scrutiny and damages your credibility.

Prevention — Don't Get Picked in the First Place

You can't guarantee you'll never be checked — random selection exists — but you can make yourself a poor target and make any check painless if it comes:

• Keep good records. Contemporaneous, organised records — invoices, receipts, mileage, bank reconciliations — are your best defence. If you can answer every question quickly, a check stays small.
• File accurate returns. Make sure declared income reconciles to your bank and to CIS deductions reported by contractors.
• Use the white space. The "white space" (additional information box) on your return lets you explain anything unusual — a one-off large repair, a drop in turnover, a change of trade. Full disclosure there can stop a check before it starts and protects you from later "discovery" assessments.
• Consider fee-protection insurance. Many accountants offer cover that pays your professional fees if HMRC opens a check. It doesn't pay any tax owed, but it removes the cost of defending an enquiry — worth having in cash-heavy trades.

Quick Reference: HMRC Compliance Check Types