How do I prepare my business for an HMRC investigation?

Understanding what an HMRC investigation is and why it happens

An HM Revenue & Customs (HMRC) investigation is a formal review of your business’s tax affairs. It can range from a straightforward request for clarification to a detailed examination of records across multiple tax heads, time periods, and business activities. Investigations might focus on corporation tax, VAT, PAYE, CIS, self-assessment for directors, or a combination of these. Some enquiries are narrow and limited in scope, while others expand if HMRC identifies risk indicators or inconsistencies during the process.

It’s important to understand that HMRC does not need your business to have “done something wrong” to open an investigation. Enquiries can be triggered by data mismatches, unusual fluctuations in figures, late filings, inconsistent submissions across taxes, sector-wide compliance campaigns, third-party information, or random selection. If you treat preparation as a standard part of good governance rather than a reaction to fear, you will be in a stronger position both operationally and financially.

Preparation for an HMRC investigation is not about trying to make your records look good after the fact. It is about building reliable systems and habits so that, if you are questioned, you can respond accurately, quickly, and confidently. That means having clean records, documented decisions, internal controls, and a clear narrative for how your numbers were produced.

Types of HMRC investigations and what they typically examine

While the experience can vary, most HMRC compliance checks fit into a few common categories. Knowing the likely scope helps you prepare in a targeted way.

Corporation tax enquiries often explore whether profits have been calculated correctly, expenses are allowable, capital allowances are appropriate, and transactions with directors or connected parties are properly treated. HMRC may test whether costs claimed are wholly and exclusively for business purposes and whether any benefits in kind have been missed.

VAT inspections commonly examine output tax reporting, input tax recovery, partial exemption (if relevant), the correctness of VAT rates applied, the place of supply rules for services, and evidence to support zero-rated or exempt supplies. HMRC also looks closely at unusual refund claims, changes in VAT positions, and high-risk sectors.

PAYE and National Insurance checks typically cover payroll accuracy, off-payroll working considerations (where relevant), benefits and expenses, and whether staff and subcontractors are correctly classified. HMRC may review payroll records, P11Ds (or payrolling benefits), expense policies, and evidence for reimbursements.

CIS reviews focus on whether contractors have correctly deducted tax from subcontractors, verified subcontractors, filed monthly returns on time, and maintained adequate supporting documentation.

Aspect enquiries are targeted checks on a single issue, such as director’s loan accounts, research and development claims, travel and subsistence, or the VAT treatment of a specific revenue stream. These can still be time-consuming, but they are usually narrower than a full enquiry.

Whatever the category, HMRC generally wants to confirm three things: that you are reporting accurately, that you have evidence for your positions, and that your processes reduce the risk of repeat errors. Your preparation should aim to satisfy those three themes.

Adopting the right mindset: prevention, transparency, and control

Preparation begins with mindset. Businesses that struggle in investigations often have two common issues: they treat record-keeping as an administrative burden rather than a core process, and they lack internal discipline around approvals and documentation. In contrast, businesses that handle investigations well behave as though they are “audit-ready” every month, not only at year-end.

That does not mean creating mountains of paperwork for no reason. It means being able to show, quickly, how a figure was derived and what evidence supports it. It means your systems are consistent, your staff know what to do, and your decisions are documented when they involve judgement calls.

Transparency matters too. HMRC is more likely to expand the scope of an enquiry when responses are slow, incomplete, contradictory, or evasive. A calm, professional approach that supplies what is requested (and nothing irrelevant) helps keep the process contained.

Getting your bookkeeping and accounting records investigation-ready

Your bookkeeping is the backbone of your defence in any tax review. If your books are unreliable, everything else becomes harder. Start with the basics: your ledgers should reconcile, your documents should be complete, and your postings should make sense. The goal is that any transaction can be traced from bank statement to bookkeeping entry to supporting evidence.

Reconcile regularly. Monthly bank reconciliations should be routine and should be reviewed by someone with suitable oversight. If you use card processing platforms or online marketplaces, reconcile those as well. Where possible, reconcile control accounts such as VAT, PAYE/NIC, and payroll clearing.

Maintain clean audit trails. If you use accounting software, ensure it records user activity and that changes are documented. Avoid deleting transactions where possible; use proper corrections so the history remains visible. If you must make adjustments, record the rationale and link supporting evidence.

Use consistent coding. Tell a coherent story through your chart of accounts. Expenses for travel, subsistence, entertaining, training, and professional fees should be coded consistently. Inconsistent coding creates confusion, can inflate risk indicators, and makes it harder to respond to questions.

Keep a supporting schedule for complex areas. For example, if you claim capital allowances, maintain an asset register and a schedule of additions and disposals, with invoices and dates. If you have accruals and prepayments, keep a breakdown showing how they were calculated and when they reverse.

Document unusual items. One-off transactions, large variances from prior periods, or journal entries that significantly affect profit deserve brief internal notes. A few lines explaining “why” can save hours later.

Building strong document retention and organisation

During an investigation, HMRC may request specific records with deadlines. If your documents are scattered across email inboxes, personal drives, and paper folders, you lose time and increase stress. A well-structured document system is one of the simplest ways to improve your readiness.

Create a clear folder structure. Organise by tax year and month, with subfolders for sales invoices, purchase invoices, bank statements, payroll, VAT returns, contracts, and key correspondence. Make the structure consistent and easy for staff to follow.

Link documents to transactions. Where possible, attach invoices and receipts directly in your accounting software. If you use a separate storage system, adopt consistent naming conventions that make searching reliable.

Retain evidence beyond invoices. HMRC may ask for contracts, statements of work, timesheets, delivery notes, proof of export, mileage logs, or emails confirming business purpose. For VAT, evidence can include customer agreements, shipping documents, and proof of payment.

Define who is responsible. Document management often fails because everyone assumes someone else is doing it. Assign responsibility for uploading documents, reviewing completeness, and maintaining the folder structure.

Protect and back up records. Use secure cloud storage with controlled access and routine backups. Limit access to those who need it and ensure you can retrieve records promptly even if key staff are unavailable.

Reviewing common risk areas before HMRC does

Some areas attract HMRC attention more often because they involve judgement, have historically been abused, or frequently contain mistakes. A sensible preparation plan includes periodic internal reviews of these topics.

Director’s loan accounts and personal expenditure

Where directors or shareholders have personal expenses running through the business, risk increases significantly. Separate personal and business spending wherever possible. If personal items are paid by the company, ensure they are correctly treated as drawings, dividends, salary, or benefits, with appropriate tax and NIC considerations. Keep the director’s loan account reconciled and supported by evidence. Avoid vague postings such as “miscellaneous” for items that might be private.

Travel, subsistence, and entertaining

These categories require clarity on business purpose. Keep records that show who travelled, where, when, and why. For meals, retain receipts and note the attendees and purpose where relevant. Ensure client entertaining is correctly treated and not confused with staff subsistence. If you reimburse employees, your expense policy should define allowable categories and required evidence.

Cash takings and till systems

If you deal in cash, robust controls are essential. HMRC may test whether sales are complete and whether cash withdrawals align with reported takings. Use numbered till rolls or digital systems that maintain logs. Record daily takings, banking, and any cash paid out. Consider periodic spot checks and document them.

VAT rates and mixed supplies

Misapplied VAT rates can lead to assessments. If you sell products or services with varying VAT treatments, maintain a VAT matrix that lists your main revenue streams and their VAT rates, with notes explaining your rationale. When something changes, update the matrix and keep a record of the decision.

Staff versus subcontractor status

Employment status issues can be costly. If you use freelancers or subcontractors, keep contracts, evidence of how the relationship operates in practice, and records of working arrangements. Ensure you are not treating employees as self-employed without strong justification, and be consistent across payroll, invoicing, supervision, and risk.

Payroll benefits and expense payments

Benefits in kind, company cars, private medical, and reimbursed personal expenses must be handled correctly. Decide whether you are filing P11Ds or payrolling benefits and ensure you have supporting documentation and approvals. Keep a register of benefits and check it against payroll and accounts.

Strengthening internal controls and governance

Internal controls are the routines and approvals that prevent errors and detect problems early. They do not need to be complicated to be effective, especially for small and medium-sized businesses.

Separate duties where possible. Ideally, the person who approves payments is not the same person who sets up suppliers and processes invoices. If you are small and cannot separate roles, use compensating controls such as periodic review by a director or external bookkeeper.

Implement approval thresholds. Define who can approve spending at different levels and require written approval for larger expenses. For unusual transactions, require a note explaining purpose and tax treatment.

Use checklists for monthly close. A monthly checklist might include bank reconciliations, VAT control account checks, payroll reconciliation, review of suspense accounts, and review of director’s loan accounts. Document completion and any issues found.

Keep board or management notes. If you make significant tax-sensitive decisions, record them briefly in board minutes or management notes. This could include dividend decisions, large asset purchases, changes in remuneration strategy, or major contract structures.

Preparing your business narrative: knowing your numbers and your story

Investigations often become stressful when business owners cannot explain their figures clearly. HMRC may ask why revenue dropped, why margins changed, why expenses spiked, or why VAT positions shifted. If you can tell a coherent story supported by evidence, the process becomes more manageable.

Track key performance indicators. Keep simple monthly metrics such as turnover, gross margin, payroll cost, headcount, average invoice value, and cash collection days. If something changes sharply, note the reason (loss of a customer, new product line, supply issues, price changes).

Maintain records of major events. A timeline of significant business events can be surprisingly useful: moving premises, launching new services, COVID-era impacts, investment rounds, changes in supplier terms, or system changes that affected invoicing.

Document changes in accounting policy or treatment. If you changed how you recognise revenue, account for stock, treat a class of expenses, or apply VAT rates, keep a written note explaining what changed and why.

Conducting a pre-investigation health check

You do not need to wait for a letter from HMRC to assess your readiness. A periodic health check can uncover issues early and reduce risk.

Start with reconciliations. Ensure bank, VAT, and payroll reconciliations are up to date and reviewed. Investigations often uncover problems that were visible in control accounts long before anyone looked closely.

Sample-test transactions. Pick a few months and sample sales invoices and purchase invoices. Confirm that each has supporting documents, correct VAT treatment, and sensible coding. Do the same for expense claims and director transactions.

Review journal entries. Large journals can be a red flag if unsupported. Ensure your journals have explanations, calculations, and documents attached where relevant.

Check filing consistency. Compare turnover figures across accounts, VAT returns, and payroll where relevant. Differences can be legitimate, but you should be able to explain them quickly.

Validate key tax positions. If you make claims or apply reliefs, keep calculation workpapers and evidence. Ensure deadlines are met and that your documentation is complete.

What to do immediately when you receive an HMRC enquiry letter

If HMRC contacts you, the first few steps can shape the entire process. The goal is to respond calmly, protect your position, and keep the scope controlled.

Read the letter carefully and note deadlines. HMRC letters usually specify what they want and by when. Do not assume the request is broader than it is. Identify exactly what is being asked.

Notify the right people internally. Inform your finance lead, bookkeeper, accountant, and any directors who may be involved. Decide who will coordinate responses so you avoid contradictory messages.

Engage professional support early. Even if you handle day-to-day finance internally, an accountant or tax adviser can help interpret HMRC requests, frame responses, and prevent scope creep. They can also identify technical issues before you disclose something that requires further explanation.

Preserve records and avoid “clean-up” in a panic. If you discover errors, do not delete data or alter records without proper procedure. Corrections should be documented transparently. Destroying or concealing records can escalate matters dramatically.

Plan your response. Gather the requested documents, check them for completeness, and draft an explanation that is factual and consistent. Ensure your submission is organised so HMRC can follow it easily.

How to communicate with HMRC during an investigation

Professional communication can reduce friction and help keep the enquiry focused. Aim to be cooperative without volunteering unnecessary information.

Keep communication centralised. Use one main point of contact, preferably your adviser if you have one. This reduces the risk of inconsistent answers.

Answer the question asked. Provide what HMRC requests and clarify where needed, but avoid sending large volumes of unrelated documents. Over-sharing can introduce new questions.

Be clear and structured. When you provide information, include a short cover note that lists what is included and how it relates to the request. Label documents clearly.

Maintain a log. Keep a record of what HMRC asked for, what you provided, and when. This helps avoid confusion and supports you if deadlines are disputed.

Ask for clarification in writing if needed. If a request is unclear or overly broad, ask HMRC to clarify scope. A clear written record can prevent misunderstandings.

Handling meetings, phone calls, and site visits

Not every investigation includes a meeting, but it can happen, particularly for VAT visits or broader compliance checks. Preparation is key.

Agree the agenda. Ask what HMRC intends to cover, what records they want available, and who should attend. This allows you to prepare and avoid surprises.

Choose attendees carefully. Include someone who understands the records and someone who can make decisions, but avoid having too many voices. Staff who are nervous or unfamiliar with the detail should not be put on the spot.

Be factual and avoid speculation. If you do not know an answer, say you will check and respond later. Guessing can create contradictions.

Control document access. Provide requested documents in an organised way rather than granting uncontrolled access to your entire accounting system. If HMRC needs additional items, supply them in a controlled manner.

Take notes. Record questions asked, answers given, and any follow-up actions agreed. This protects your business and ensures you respond consistently.

Correcting errors and making disclosures responsibly

If your review identifies mistakes, addressing them promptly and transparently is usually better than hoping they will not be noticed. However, how you correct errors matters.

Quantify the impact. Determine which tax is affected, the relevant periods, and the amounts. Separate careless errors from matters that involve interpretation. Keep calculations and supporting evidence.

Take advice where needed. Some corrections can be made through amended returns or adjustments in subsequent filings, while others require more formal disclosure. A professional adviser can help you choose the right route and present it appropriately.

Fix the underlying cause. HMRC often focuses on whether errors are likely to recur. Demonstrate that you have improved processes, trained staff, or changed controls to prevent repetition.

Training staff and creating a culture of compliance

Many compliance problems come from well-meaning staff who do not understand the tax implications of what they are doing. Training is not just for accountants; it is for anyone who submits expenses, raises invoices, approves purchases, or manages payroll data.

Expense training. Teach staff what evidence is required, what business purpose means, and what is not allowable. Provide examples and make the process easy to follow.

Invoice training. Ensure staff understand correct invoicing, VAT requirements, and the importance of consistent customer data. Errors in invoicing create knock-on problems in VAT and revenue reporting.

Payroll training. Make sure those involved in payroll understand cut-off, leavers, starters, benefits, and the documentation required for reimbursements.

Create simple policies. Clear written policies for expenses, approvals, procurement, and record retention reduce ambiguity. Keep them short, practical, and aligned with how the business actually operates.

Using technology to reduce investigation risk

Modern accounting and finance tools can reduce errors and improve audit trails, but only if configured and used correctly.

Automate where appropriate. Bank feeds, rules-based coding, and invoice capture can improve efficiency, but they should be reviewed. Automation without oversight can replicate mistakes at scale.

Lock periods after close. If your software allows it, lock prior months once reconciled and reviewed. This prevents accidental changes that create inconsistencies.

Use role-based permissions. Limit access so staff can only perform actions relevant to their job. This reduces the risk of incorrect postings or unauthorised changes.

Maintain version-controlled workpapers. For key calculations (such as VAT adjustments, capital allowances, or complex accruals), keep workpapers in a controlled environment so you can show what was done and when.

Preparing specific packs for common HMRC requests

One practical way to stay ready is to maintain “packs” of information that are commonly requested. When an enquiry arrives, you can respond faster and with less disruption.

VAT pack. Keep copies of VAT returns, detailed VAT reports, reconciliations to the VAT control account, evidence for zero-rated supplies, and explanations for unusual movements (such as large refunds or major rate changes).

PAYE pack. Maintain payroll summaries, RTI submissions, reconciliations of payroll to accounts, benefit registers, expense policy documents, and evidence for reimbursed expenses.

Corporation tax pack. Keep year-end accounts, corporation tax computations, capital allowance schedules, fixed asset register, director’s loan account reconciliations, and documentation for significant provisions or one-off items.

Contract pack. For key revenue streams, retain signed contracts, statements of work, change orders, and evidence of delivery. This can support revenue recognition, VAT treatment, and the commercial rationale behind transactions.

Managing stress, time, and business continuity during an investigation

An HMRC investigation can consume attention and disrupt operations. Planning helps you maintain business reassurance and continuity.

Allocate time and responsibilities. Assign a coordinator to manage requests and deadlines. Build time in the diary for gathering documents and reviewing responses.

Protect sensitive information. Ensure data is shared securely, with access limited to what is necessary. Keep personal data in line with privacy obligations.

Maintain normal operations. Do not let the investigation halt routine bookkeeping and compliance. Falling behind can create new issues while the investigation is ongoing.

Use professional support to reduce burden. Advisers can handle much of the communication and help you present information efficiently, freeing you to focus on running the business.

After the investigation: learning and improving

Whether HMRC concludes with no change, a small adjustment, or a significant assessment, treat the experience as feedback on your systems.

Conduct a post-review. Identify what caused the enquiry, what issues were found, and what caused delays or confusion. Document lessons learned.

Update policies and controls. If you discovered weaknesses in expense approvals, VAT rate application, or document retention, improve meaningfully. Implement checklists, training, and periodic review schedules.

Strengthen your relationship with your adviser. Regular check-ins and proactive reviews can catch issues early and provide reassurance that your business remains compliant as it grows.

Maintain investigation readiness. The best time to prepare is when nothing is happening. If you build investigation readiness into monthly routines, you reduce risk, speed up responses, and lower the chance of an enquiry escalating.

A practical preparation checklist you can act on now

To turn the guidance into action, use the following checklist as a starting point and tailor it to your business:

1) Records and reconciliations: Perform monthly bank reconciliations; reconcile VAT and payroll control accounts; review suspense accounts; keep an up-to-date fixed asset register.

2) Document management: Store invoices, receipts, and supporting evidence in a consistent structure; link documents to transactions; use clear naming conventions and secure backups.

3) High-risk areas: Reconcile director’s loan accounts; document business purpose for travel and subsistence; apply VAT rates consistently; maintain evidence for zero-rated or exempt supplies; review worker status decisions.

4) Controls and approvals: Define approval thresholds; separate duties where possible; lock accounting periods after review; document significant judgements and one-off transactions.

5) Policies and training: Keep expense and procurement policies updated; train staff on evidence requirements; ensure payroll and invoicing processes are understood and consistent.

6) Response readiness: Maintain VAT, PAYE, and corporation tax packs; keep a log template for HMRC correspondence; identify your internal coordinator and external adviser contacts.

By implementing these steps, you are not only preparing for an HMRC investigation but also building a stronger, more disciplined finance function. That typically leads to better decision-making, improved cash control, fewer surprises at year-end, and a business that can scale with confidence.