HMRC runs checks to make sure the right tax is paid at the right time, that reliefs and allowances are correctly claimed, and that people who under-declare are found. Some selections come out of risk profiling, some come from a specific entry on a return, and some are random.

The patterns that draw attention

• Figures that do not sit with the rest of the return, such as a gross profit margin well below others in the same trade.
• A sizeable VAT repayment claim when turnover is low.
• A small tax liability declared against high sales.
• Round-sum expenses, or costs that jump sharply with no change in the business.
• Information from a third party that does not match what you filed.

What a check can cover

The letter sets the scope. It might be one line on one return, or it might be the whole return. HMRC can look at accounts and tax computations, your Self Assessment return, your Company Tax Return, your VAT records, and your PAYE records and submissions if you employ people. A VAT check on a shop or takeaway often starts with till records and bankings, because that is where the gap between declared sales and real sales shows up.

What it does not mean

A check is not an accusation. HMRC also writes to say a check is closed with no change, and sometimes with money back. Read the letter, note the scope, note the deadline, and do not widen the conversation beyond what has been asked. If you want the scope read properly before you reply, send us the letter.

The opening letter does four jobs. It tells you which tax and which period HMRC is checking. It says, in general terms, why. It lists the records or information wanted. It gives a case reference number and the name and contact details of the officer handling it.

If you have an agent

Where you have authorised an agent with HMRC, the officer writes to the agent as well. In practice, that is the single biggest change for a client who joins us mid-way through their accounting year: the letters land with us, we read them, and we tell you in plain English what HMRC is actually asking for. You do not have to decode it yourself.

Visits

HMRC may ask to come to your business premises, your home if you trade from there, or your adviser’s office. They may instead ask you to come to them. You are entitled to have your accountant or a legal adviser with you for any visit, and we would always want to be there. For a shop or a takeaway, a visit usually means someone looking at the till, the Z readings, the purchase invoices and the cash banked.

Deadlines on the letter

There will be a date by which HMRC wants a response. If that date is unrealistic because records sit with a former accountant or a bookkeeper on leave, say so in writing before the date, not after. Officers will usually agree a short extension if you ask early and explain why. Ring the officer named on the letter, or ask us to.

There is a difference between HMRC asking and HMRC requiring. Early letters often ask informally. Co-operating with an informal request is usually sensible, because it keeps the check short and it counts in your favour later when penalties are considered.

Information notices and inspection notices

If you do not supply what has been asked for, HMRC can issue a formal information notice for documents, or an inspection notice to visit premises. Ignoring one of those, or refusing a visit covered by one, can bring a penalty. A reasonable excuse, such as serious illness or a bereavement, is accepted, but it has to be genuine and you need to tell HMRC about it.

Where the line sits

HMRC cannot demand material that falls outside the scope of the check without extending it, and certain legally privileged items are protected. If a request looks like it is quietly widening a VAT check into a full review of three years of personal bank accounts, that is the moment to get an adviser involved rather than posting the lot.

If you think the check should stop

You can write to HMRC setting out why you believe the check should be closed, and you can apply for alternative dispute resolution at any point if you and the officer are stuck on a point of fact or a decision. If HMRC issues a decision you disagree with, there is a formal appeal route. None of these are hostile acts. They are part of the process.

If you are not sure whether a request is reasonable, send the letter over before you answer it.

HMRC has an online service for sending documents during a compliance check. It only applies if you have had a letter from the compliance team asking for information, and you need the case reference number printed on that letter.

The practical limits

• Each file has to be 15MB or less.
• Accepted formats are PDF, JPEG, XLSX, ODS, DOCX, ODT, PPTX and ODP.
• Ten documents per upload. If you have forty invoices, that is four submissions.
• You sign in to use it, and you can save your progress and return later.
• You get a confirmation email with a submission reference. Keep every one of those.

An authorised agent can do all of this for you, which is normally the better route, because what you send and how it is presented shapes how the officer reads your case.

How to present records

Send what was asked for, labelled so the officer can find things without ringing you. A schedule that ties the sales figure on the return to the bank statements and the till reports does more good than a box of paper. Where a figure needs explaining, explain it in a short covering note rather than hoping nobody asks.

Keep your own copy

Copy everything before it goes. We had a retail client whose previous accountant, an unregulated sole practitioner, died and took the records with him. We obtained copies of everything from HMRC, rebuilt the books and brought every return up to date. That is recoverable, but it costs time nobody wants to spend. Scan as you go and store it somewhere you control.

If the check finds an inaccuracy that means tax was unpaid, understated or over-claimed, HMRC considers a penalty. The starting point is behaviour.

The behaviour categories

• Reasonable care taken: no penalty, even if the figure was wrong. Keeping proper records and asking an adviser or HMRC when you were unsure is evidence of reasonable care.
• Careless: a mistake you could have avoided with reasonable care.
• Deliberate: you knew the return was wrong.
• Deliberate and concealed: you knew, and you took steps to hide it.

Using an accountant does not pass the responsibility over entirely. If you ask someone to act for you, you still have to do what you reasonably can to make sure what they file is right, which in practice means reviewing figures and answering their questions honestly.

Prompted and unprompted

A disclosure is unprompted if you tell HMRC before you have reason to think they have found the problem or are about to. Anything else is prompted. Once a check has started, a disclosure about the matter being checked cannot be unprompted, because you already know HMRC is looking. The minimum penalty for an unprompted disclosure is lower, so if you know about an error now, before any letter arrives, that knowledge has a cash value.

Telling, helping and giving

Within either category, HMRC reduces the penalty according to the quality of your disclosure: telling them about it, helping them work out what is owed, and giving access to records. A careless inaccuracy you find and disclose unprompted after filing in good faith can be reduced to nothing. HMRC can also suspend a careless penalty where you agree to conditions that stop it happening again. Where a company’s inaccuracy was deliberate, a company officer can be made to pay part or all of the penalty personally.

HMRC writes to tell you the outcome. There are three realistic endings.

No change

The officer is satisfied and closes the check. Keep the closure letter with the records for that year.

You have overpaid

HMRC repays the difference, and interest can be added. This happens more often than people expect, usually where a relief was missed rather than over-claimed.

You owe more

HMRC asks for the additional tax, normally within 30 days, with interest running from the date the tax was originally due. Any penalty is dealt with separately and will be explained in writing.

If you cannot pay in one go, say so early and ask about a payment arrangement. HMRC is far more willing to discuss time to pay before the due date than after it. We had a client owing roughly £20,000 across Corporation Tax, VAT and Self Assessment with no idea what the debts were for. We went through every line. Much of the Self Assessment balance turned out to be payments on account based on estimates, so we filed his return early. That part of the debt was cancelled and HMRC wrote off the interest charged on it. He ended up knowing exactly what he owed and paying far less.

If you disagree with the decision, you can appeal, and alternative dispute resolution remains available. Whatever the outcome, fix the cause. A check that found a till reconciliation problem will find it again next time if the till process does not change.