HMRC does not investigate randomly. It looks at data, risk models, and information from third parties to decide who to check. Knowing what can put you on its radar helps you keep your tax affairs in order and spot problems before HMRC does.
Disclaimer: This article is for general information only. It does not constitute tax advice. If HMRC has contacted you, speak to a qualified accountant immediately.
What are the most common triggers for an HMRC investigation?
HMRC uses a mix of automated data analysis and manual referrals to choose who to investigate. The most common triggers are inconsistencies between your tax return and third-party data, unexplained jumps in income or expenses, and figures that do not fit the pattern for your industry.
These triggers are not secret. HMRC publishes guidance on risk indicators, and its data systems are extensive. The main ones are below.
Figures that do not match third-party data
HMRC receives data from banks, employers, pension providers, and Companies House. It compares that information with your tax return automatically. If your return shows less income than your bank deposits suggest, HMRC will usually take a closer look.
Landlords are a common example. HMRC also receives data from letting agents and property platforms. If your rental income return does not match what those platforms report, it can draw attention.
Inconsistencies between years
A sudden fall in income or a sharp rise in expenses raises questions. If your gross profit margin drops from 45% to 20% with no explanation, HMRC will want to know why.
This matters even more for cash businesses. If your declared income falls but your lifestyle spending stays the same, HMRC can review what you may have earned.
Returns that do not match your industry
HMRC uses industry benchmarks. If your tax return shows expenses or margins that look unusual next to similar businesses, that is a warning sign.
For example, if most sole traders in your sector report a 30 to 40% gross margin and yours stays at 5%, HMRC will notice.
What are the red flags that put you on HMRC’s radar?
The biggest red flags are late or missing returns, offshore assets that are not declared, cash-heavy businesses with low declared income, and large round-number claims that look more like estimates than real figures.
HMRC often looks for these patterns:
Late or amended returns. Filing late again and again suggests poor record-keeping. Amending a return soon after filing can also lead to questions if the change is large.
High expense claims relative to income. Claiming most of your income as business expenses, especially for home office, travel, or entertainment, is a known risk indicator.
Round-number entries. Figures like £10,000 for travel or £5,000 for office supplies look like guesses. Real business expenses usually come with receipts and exact amounts.
Tips from third parties. Former employees, business partners, or competitors can report suspected tax evasion to HMRC. HMRC takes these reports seriously, and they often lead to investigations.
Offshore accounts or foreign income. HMRC shares data with more than 100 countries under the Common Reporting Standard. Undisclosed offshore income is much easier for HMRC to find now.
How does HMRC choose who to investigate?
HMRC uses a system called Connect to cross-reference data from more than 30 sources. These include DVLA, Land Registry, Companies House, banks, and social media. Connect flags mismatches between declared income and lifestyle indicators.
Connect is automated. It runs all the time and scores risk across millions of taxpayers without human input. Only the highest-risk cases are passed to a human inspector.
HMRC also runs targeted campaigns in sectors where it sees compliance problems. Construction, hospitality, and online sellers have all been targeted in recent years.
If HMRC finds that a sector’s reported margins are consistently below what the evidence suggests is possible, it starts a disclosure campaign and then follows up with anyone who did not come forward.
How likely are you to be investigated by HMRC?
Fewer than 1 in 100 tax returns lead to a formal investigation. The risk is higher for self-employed people, company directors, landlords, and anyone who runs a cash-based business.
An investigation does not always mean HMRC suspects fraud. Many cases start as routine checks, called aspect enquiries, where HMRC asks about one specific line on your return. These often end quickly if your records are in order.
Full investigations, which cover your entire tax return, are less common. They usually happen when HMRC has evidence of a serious mismatch or gets a third-party tip.
The best protection is clean records. If you can explain every figure on your return with receipts, bank statements, and invoices, an HMRC enquiry is much easier to handle.
What should you do if you get a letter from HMRC?
Do not ignore it. HMRC letters have deadlines. If you miss them, a routine check can turn into a formal investigation.
Read the letter carefully. An aspect enquiry only covers the issue named in the letter. A full enquiry covers everything. The letter will usually make that clear.
Do not respond without taking advice. What you say in your first reply sets the tone for the rest of the process. An accountant with HMRC investigation experience can help you respond accurately and avoid making things worse.
If you think there is an error in a previous return, it is often better to disclose it early. HMRC usually treats voluntary disclosures more favourably than errors it finds itself. You can get help with an HMRC enquiry from a qualified accountant before you respond.
How can you reduce your risk of an HMRC investigation?
Keep accurate records throughout the year, not just when it is time to file your return. HMRC can request up to 6 years of records in a standard enquiry, and up to 20 years if it suspects intentional evasion.
File on time every time. Late filings increase your risk score in HMRC’s systems.
Review your return before you submit it. Check that your figures are consistent with last year, that your expense claims are reasonable, and that all income sources are included.
If you are unsure about any part of your tax return, especially expenses, offshore income, or capital gains, get professional advice before you file. A small mistake now is far cheaper to fix than an investigation later.
DASA can help if HMRC makes contact
If you receive a letter from HMRC or have concerns about your tax position, speak to us early. We work with businesses and individuals during HMRC enquiries, from the first letter through to resolution.
Get a quote and we will send you our current pricing for DASA’s HMRC investigation service.