10 Myths About HMRC Investigations Small Businesses Still Believe
- Yashi Shrivastav
- Nov 14
- 5 min read
If HMRC ever contacts me, it means I’ve done something wrong.
It’s one of the most common fears among UK founders. But in reality, an HMRC compliance check doesn’t always mean trouble.
Most checks are routine, designed to keep the system fair. In 2024-25, HMRC completed 316,000 compliance checks to keep the system fair, so selection alone doesn’t mean you’ve done anything wrong.
At AMS, we help UK SMEs handle HMRC enquiries calmly and confidently. Here, we unpack the ten biggest myths so you can face any compliance check with clarity and control.
Myth 1: HMRC only investigates if you’ve done something wrong
Reality: HMRC runs both risk-led and random checks. Random selection exists alongside risk-based selection, and it doesn’t imply suspicion.
In practice, HMRC conducts enquiries that may be “full” (broad) or “aspect” (focused).
However, these are internal classifications. In law, all enquiries are into the return as a whole, even if the scope is narrow.
Common triggers include:
Inconsistencies between returns and third-party data.
Late filings or late payments.
High-risk sectors such as construction, hospitality, and cash-based trades.
Unusual swings in income, expenses, or VAT reclaims.
Founder takeaway: Being selected doesn’t mean wrongdoing. Keeping organised, up-to-date records makes any enquiry faster and less stressful.
Myth 2: If return was accepted, HMRC can’t revisit it.
Reality: HMRC can review earlier years within statutory time limits, and the window depends on the behaviour involved and the tax type.
Tax Type | Time Limit | When It Applies |
Direct taxes (Corporation Tax, Income Tax) | 4 years (normal), 6 years (careless), 20 years (deliberate) | HMRC must show carelessness or deliberate behaviour to extend beyond 4 years. |
VAT | Generally 4 years, up to 20 years for dishonest conduct | Different statutory rules apply to VAT than to direct taxes. |
Founder takeaway: Keep supporting records for at least six years (and longer for VAT where relevant). “Accepted” doesn’t mean “final”, just that HMRC hasn’t raised questions yet.
Myth 3: An investigation always means a big on-site audit
Reality: Many checks are completed by correspondence with a defined scope; HMRC may request meetings or visits where proportionate.
Depending on the issue, HMRC may ask for:
Bank statements and reconciliations.
Expense and VAT evidence.
Payroll or RTI submissions.
Clarifications of entries or figures.
Meetings or visits usually arise only in higher-risk or complex cases.
Founder takeaway: Treat an enquiry as a process. Respond promptly, provide clear evidence, and stay factual and polite.
Myth 4: Any mistake equals a fine
Reality: HMRC sets tax penalties according to the behaviour behind the error and the level of care taken when preparing your return.
Under Schedule 24 of the Finance Act 2007, penalties differ by behaviour:
Careless: you didn’t take reasonable care.
Deliberate: you knew it was wrong.
Deliberate and concealed: you actively hid it.
Taking reasonable care, keeping proper records, seeking advice, checking submissions, protects you. Penalties for careless errors can be suspended if you meet conditions such as improving systems or training staff.
Founder takeaway: Honest mistakes aren’t crimes. Transparency, good processes, and early disclosure always reduce risk.
Myth 5: HMRC can ask for anything without limit.
Reality: HMRC’s information powers are broad but not boundless.
A valid request must:
Be relevant to the tax or period in question.
Be proportionate to the risk being reviewed.
Specify what is required, the period covered, and the legal basis.
If you receive a request that feels unclear, you can, and should ask HMRC to clarify scope before responding.
Founder takeaway: You have the right to understand why information is requested. Timely, accurate responses protect your position and demonstrate cooperation.
Myth 6: If I digitise receipts later, that’s good enough
Reality: HMRC expects accurate, timely, and contemporaneous record-keeping. Recreating evidence after the fact undermines credibility and can trigger deeper review.
Practical expectations:
VAT: Keep digital invoices, receipts, and payment evidence (Making Tax Digital rules).
PAYE: Retain RTI submissions, payslips, and P11D data.
Corporation Tax: Maintain ledgers, contracts, and source documentation.
Founder takeaway: Record as you go. Cloud accounting software helps ensure your books are compliant and audit-ready every day.
Myth 7: Only big businesses get investigated
Reality: HMRC uses automated risk analytics that monitor all UK businesses. SMEs are checked just as often as large companies.
HMRC analyses:
Tax returns (CT, VAT, Self-Assessment).
PAYE and CIS data.
Companies House filings.
Bank and third-party data feeds.
Founder takeaway: Size doesn’t matter, systems do. Consistency across all filings keeps you low-risk in HMRC’s algorithms.
Myth 8: “You can’t reduce penalties once HMRC finds an error.”
Reality: You can and how you respond is key.
Penalty levels depend on:
Disclosure quality: unprompted disclosures earn higher reductions.
Cooperation: full, timely engagement counts in your favour.
Correction: fixing systems or training staff may justify suspension for careless errors.
Founder takeaway: Early honesty pays. Being open, organised, and solution-oriented often turns a penalty into a warning or removes it entirely.
Myth 9: Investigations are always adversarial
Reality: HMRC’s compliance process is structured and transparent, focused on reviewing information fairly.
Typical stages include:
Notice of a compliance check.
Information request outlining what HMRC needs.
Review and discussion to assess evidence.
Outcome, advice, amendment, or closure.
You can request an internal review or appeal if you disagree with findings.
Founder takeaway: Stay professional and composed. Most cases resolve through clear communication..
Myth 10: Once it’s closed, I don’t need to change anything
Reality: HMRC expects improvement. Repeating the same issue later can increase penalties.
After-action checklist:
Update procedures and internal controls.
Train staff on record-keeping and filing.
Reconcile ledgers and banks monthly.
Document process changes and evidence of fixes.
Founder takeaway: Closure isn’t the end, it’s your opportunity to future-proof your systems.
And, before you panic about “audit-readiness,” here’s what it actually looks like in practice. Use this quick checklist to keep your records clean, compliant, and HMRC-ready all year round.
Frequently Asked Questions
Q: What happens when HMRC starts an investigation?
HMRC will send a formal letter explaining what they’re checking and what information they need. You’ll be asked to provide records such as VAT evidence, payroll reports, or bank statements. Responding clearly and on time keeps the process smooth and avoids escalation.
Q: How long do HMRC investigations take?
Simple checks can finish in a few weeks, while broader enquiries may take longer. Timely, accurate responses usually speed up the process. Delays often happen when records are incomplete or unclear.
Q: What are the most common reasons HMRC investigates small businesses?
Triggers often include inconsistent VAT returns, late submissions, or figures that don’t match third-party data. Sectors with high cash usage or irregular patterns may attract closer review. Keeping clean, consistent records helps keep your risk low.
Compliance Without Fear
HMRC investigations don’t need to cause sleepless nights. With accurate records, timely filing, and calm responses, even an enquiry becomes a straightforward process.
At AMS, our ACCA-qualified team helps UK SMEs stay audit-ready, from proactive bookkeeping to confident HMRC correspondence.
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