What happens if HMRC challenges my declared turnover?

Understanding what “declared turnover” means in HMRC’s eyes

Turnover is one of those business words that sounds simple—“how much money came in”—until you’re the one having to define it on a tax return and HMRC wants to know exactly how you arrived at your number. In the UK, “turnover” usually means your total business income from sales of goods or services, before you deduct expenses. Depending on how you operate, turnover may appear on a Self Assessment tax return (as a sole trader or partner), on a Company Tax Return (via your company accounts), on VAT returns (as taxable supplies), and sometimes across other returns or declarations.

Problems start when different systems use different labels, or when you (perfectly reasonably) think of “income” one way but HMRC expects another. For example, you might think of turnover as “what actually landed in my bank,” but HMRC often cares about what you invoiced or earned in an accounting period, especially if you use accruals accounting. Or you might net off refunds, platform fees, or commissions in a way that doesn’t match how the underlying transactions should be presented. None of this automatically means you’ve done anything wrong, but it does mean HMRC may challenge a figure if it doesn’t align with other information it holds.

When people ask what happens if HMRC challenges declared turnover, they’re usually worried about two things: (1) how intrusive the process will be, and (2) what the financial consequences could be if HMRC decides the turnover should have been higher. Both are valid concerns. The good news is that most challenges follow a fairly structured route, and you can reduce the stress and the risk by understanding what triggers challenges, what HMRC will request, and how to respond in a way that is calm, accurate, and well-evidenced.

Why HMRC challenges turnover in the first place

HMRC’s job is to collect the correct amount of tax. Turnover matters because it feeds into multiple taxes and obligations: Income Tax, Corporation Tax, VAT, National Insurance, the trading allowance, the need to register for VAT, eligibility for certain reliefs, and more. If HMRC thinks turnover is understated, it may suspect that profits are understated too. Even if your expenses are high, turnover is still a key indicator.

Challenges can arise for many reasons, including simple inconsistencies. HMRC receives and cross-checks information from various sources. If something doesn’t “match” across systems, it may prompt questions. A challenge does not automatically mean HMRC believes you’ve committed fraud. In many cases it’s about clarifying accounting treatment, reconciling numbers, or correcting mistakes.

Common reasons HMRC challenges declared turnover include:

Data mismatches: Turnover on your Self Assessment doesn’t seem to align with amounts reported by payment processors, platforms, or other third parties.

VAT anomalies: Your VAT returns show taxable sales that don’t align with your accounts or your Income Tax/Corporation Tax filings.

Unusual ratios: Your turnover is low compared to industry benchmarks, staff costs, stock purchases, or card takings.

Sudden changes: Turnover drops sharply year-on-year without a clear explanation.

Cash businesses: Where cash is significant, HMRC may be more likely to examine how takings are recorded.

Random checks: Some checks are risk-based, some are random, and some are prompted by targeted compliance campaigns.

How a turnover challenge typically starts

Most people learn about a challenge through a letter, a message in their online tax account, or contact from an HMRC officer. The tone may vary from routine (“we’re checking your return”) to more direct (“we believe the figures may be incorrect”). The starting point is usually one of the following:

1) An informal query—HMRC asks for clarification or requests specific documents without formally opening an enquiry. This can happen when something is easily reconciled, such as a figure that looks inconsistent but has an innocent explanation.

2) A formal enquiry (or check)—HMRC opens an enquiry into a tax return or aspect of your tax affairs. In practice, this means HMRC is investigating and has powers to request information reasonably required to check your tax position.

3) An assessment outside an enquiry—in some circumstances HMRC may issue an assessment or amend a return based on information it holds. You usually have rights to challenge or appeal, but the approach differs from a standard enquiry process.

It’s important to read any correspondence carefully. HMRC letters often specify what they’re checking, what period they’re looking at, what they want from you, and deadlines. Missing deadlines can make things harder, so even if you need time to gather records, acknowledge the request and, if necessary, ask for an extension in a professional way.

What HMRC will ask for when turnover is in question

If HMRC challenges turnover, it will typically seek evidence of how you generated and recorded sales. What they request depends on your business type and how you take payment, but common requests include:

Sales records: invoices, receipts, till reports, booking systems, job sheets, order confirmations, or contracts.

Bank statements: business accounts and sometimes personal accounts, especially if there is a suspicion that business income is passing through personal banking.

Payment processor reports: Stripe, PayPal, Square, iZettle, Worldpay, Shopify payments, Etsy, Amazon, eBay, Deliveroo/Uber Eats, Upwork/Fiverr, and similar.

VAT working papers: summaries showing how VAT return figures were compiled, and what was included/excluded.

Accounts and bookkeeping data: ledgers, trial balances, bookkeeping exports from Xero/QuickBooks/FreeAgent, cashbooks, and reconciliations.

Stock and purchases: purchase invoices, stock records, and sometimes a “mark-up” analysis where HMRC checks whether sales are plausible given purchases.

Diary/appointment records: for service businesses—calendars, booking systems, and job logs can help show work performed.

Cash records: daily takings sheets, till Z-reads, petty cash logs, and cash banking records.

The aim is usually to reconcile the turnover reported to underlying transactions. HMRC may test a sample period or focus on specific areas, such as card takings, cash, online platform sales, or refunds.

The difference between an honest mistake and “careless” or “deliberate” behaviour

When turnover is wrong, consequences depend heavily on why it was wrong. HMRC tends to think in categories of behaviour. Understanding these categories matters because they influence penalties.

Genuine mistake (reasonable care taken): You kept decent records, tried to get it right, but a mistake happened anyway. This tends to reduce penalties and can sometimes mean no penalty at all, even if extra tax is due.

Careless error: The mistake happened because you didn’t take reasonable care—poor record keeping, missing invoices, not reconciling, guessing figures, or misunderstanding rules without checking.

Deliberate understatement: Income was intentionally left out, records were manipulated, or sales were concealed.

Deliberate and concealed: As above, but with steps taken to hide the behaviour—fake invoices, double sets of records, or deliberate obstruction.

You don’t need to use these labels yourself when replying. But you should be aware that HMRC’s approach may be shaped by how complete your records are, how consistent your explanations are, and how transparent you are when asked to provide evidence.

What happens during a formal enquiry

A formal enquiry is not necessarily dramatic, but it is serious. Think of it as a structured investigation. Once an enquiry is open, HMRC may ask questions, request documents, and ask for explanations of how you record income. You may go through several rounds of information requests.

Typical stages include:

Opening letter and scope: HMRC tells you it’s checking your return and what it wants first.

Information gathering: You provide the documents requested, often with a written explanation and summaries to make the numbers easy to follow.

Follow-up questions: HMRC may ask about gaps, unusual items, or areas it wants to test more deeply.

Meetings or calls: Sometimes HMRC proposes a meeting to walk through the business, the records, and the accounting approach.

Proposed adjustments: HMRC sets out its view of the correct figures (for example, higher turnover) and the tax impact.

Negotiation and resolution: If you disagree, you can provide further evidence and arguments. Many cases are resolved through discussion and clarification.

Closure: HMRC closes the enquiry, either with no change or with agreed amendments and settlement terms.

The practical experience of an enquiry depends on the complexity of your business and the quality of your records. If your bookkeeping is solid and your turnover ties neatly to bank and processor statements, the process can be straightforward. If records are missing or messy, the enquiry can become longer and more expensive in time and professional fees.

How HMRC might calculate “additional turnover” if it believes yours is too low

If HMRC is not satisfied with your records, or believes sales are missing, it may use indirect methods to estimate turnover. This can feel unfair if the estimate is too high, but it’s often how disputes arise: HMRC uses a method that seems “reasonable” from its perspective, and you provide evidence to show why it’s not accurate for your business.

Common estimation approaches include:

Bank deposit analysis: HMRC totals incoming bank credits and compares them to declared turnover, adjusting for transfers, loans, and non-business receipts.

Business economics / mark-up: HMRC looks at purchases (stock, materials) and applies a mark-up to estimate sales, sometimes using industry benchmarks.

Unit/volume method: For certain trades (e.g., hospitality), HMRC may estimate sales based on units sold, capacity, opening hours, or similar indicators.

Third-party data matching: HMRC compares your reported income to figures from platforms or payment processors.

Sampling: HMRC examines a sample period in depth and extrapolates to the whole year.

The best way to counter an unrealistic estimate is to provide better underlying records and reconciliation. If you can show complete sales evidence and explain anomalies (like high refunds, split payments, or platform fees), you can often bring the discussion back to actual figures rather than estimates.

Potential outcomes if HMRC challenges your turnover

There are a few broad outcomes, and not all of them are bad:

No change: You provide evidence, HMRC is satisfied, and the matter closes with no adjustment.

Amendment to turnover and tax: HMRC and you agree a higher turnover figure, which increases taxable profits (unless there are also allowable expenses that were missed). You pay the extra tax, interest, and possibly penalties.

Adjustment plus wider implications: If turnover affects VAT registration, VAT returns, or other taxes, HMRC may extend the review to those areas and periods.

Dispute and appeal: If you cannot agree, the matter may proceed through formal dispute routes, including internal review and tribunal processes.

Serious enforcement (rare in routine cases): If HMRC believes there is deliberate concealment, it may escalate the case. The vast majority of turnover challenges for small businesses remain within civil compliance processes, but deliberate evasion can lead to much more serious consequences.

What financial consequences could follow

If HMRC successfully argues that your turnover should be higher, the financial consequences usually come in three layers:

1) The extra tax—Income Tax/Corporation Tax (and possibly VAT) due on the corrected figures.

2) Interest—charged on late-paid tax. Interest is not a penalty; it’s meant to reflect the time value of money.

3) Penalties—these depend on behaviour (genuine mistake vs careless vs deliberate), whether you disclosed the issue voluntarily, how helpful you were, and how quickly you provided information.

In practice, penalties can vary widely. If you discover an error yourself and make a prompt, voluntary disclosure, that can significantly reduce penalties compared to a situation where HMRC finds the problem and you resist or delay. If the issue is genuinely due to a misunderstanding and you kept reasonable records, penalties may be reduced or potentially not charged at all.

VAT-specific risks when turnover is challenged

Turnover challenges often intersect with VAT. HMRC might compare your VAT taxable turnover (from VAT returns) with turnover in accounts or with Self Assessment figures. Differences are not automatically wrong: some sales are VAT-exempt, outside the scope, or occur on different timing bases. But if HMRC thinks your VAT returns are understated, it may assess additional VAT, potentially with penalties and interest.

Another common VAT issue is the registration threshold. If your turnover should have pushed you over the VAT registration threshold in a past period, HMRC may argue that you should have registered earlier. That can lead to VAT being due from the date you should have been registered, even if you didn’t charge VAT to customers at the time. In some cases, you can mitigate the impact depending on the nature of your customers, your pricing, and whether you can issue VAT invoices retrospectively. But it can still be a painful scenario, especially for consumer-facing businesses where you can’t realistically recover VAT from customers after the fact.

If you’re in this situation, it becomes crucial to separate questions: (1) what your true taxable turnover was, (2) whether you crossed the threshold, (3) what VAT would be due, and (4) whether there are reliefs or mitigation arguments available based on the facts.

Practical steps to take the moment you receive an HMRC challenge

The first few days matter. A measured response can prevent the issue from spiralling. Here’s what to do immediately:

Read the letter carefully and identify the scope. Is HMRC questioning a specific figure, a specific year, VAT, or something else? The scope tells you what to prioritise.

Note deadlines. Put them in your calendar. If you need more time, request it early and politely.

Preserve records. Don’t delete anything. Export reports from platforms and bookkeeping systems. Save bank statements. Keep copies of what you send.

Start a reconciliation file. Create a simple summary that ties declared turnover to bank receipts, processor reports, invoices, and VAT returns. This can be the backbone of your explanation.

Consider professional help. If the sums are significant, the records are complicated, or you feel overwhelmed, a tax adviser can help you present the information clearly and respond strategically. Even a few hours of advisory time can reduce risk if it prevents misunderstandings.

How to respond in a way that helps you

When dealing with HMRC, the goal is to be clear, cooperative, and evidence-led, without volunteering unnecessary speculation. That means:

Answer what was asked. If HMRC asks for specific documents, provide those documents and explain how they support your turnover figure.

Use summaries and explanations. Don’t dump thousands of pages without context. Provide a reconciliation schedule and label your files so HMRC can follow the trail.

Explain timing and accounting basis. If you use cash basis, say so. If you use accruals, explain how year-end debtors/creditors affect turnover.

Address obvious anomalies proactively. If you have unusually high refunds one month, or a big one-off contract, explain it. It’s better than leaving HMRC to guess.

Stay consistent. Inconsistency creates suspicion. If you later realise you made an error in your explanation, correct it promptly and transparently.

Keep records of communications. Save emails/letters and notes of calls, including dates and what was discussed.

Common turnover misunderstandings that trigger disputes

Many turnover disputes are rooted in accounting misunderstandings rather than hidden income. Here are some recurring ones:

Net vs gross reporting on platforms: Online platforms might pay you “net” after fees, but your turnover may be the gross amount charged to the customer, with fees shown as an expense. Whether you should report gross or net can depend on whether you are acting as principal or agent. This distinction can be technical and often requires looking at contract terms and who is supplying the service to the end customer.

Refunds and chargebacks: If you had significant refunds, you may have netted them off inconsistently across accounting and VAT.

Mixed income streams: A business might have sales, grants, tips, commissions, affiliate income, and reimbursements. Some are turnover, some are other income, some may be outside VAT scope, and timing can differ.

Cash vs accrual timing: Invoices raised in one period but paid in another can shift turnover depending on the accounting basis used.

Personal account usage: If customers pay into a personal account, or if you mix personal and business spending, HMRC may struggle to follow the trail, which increases the chance of assumptions being made against you.

If HMRC says your records are inadequate

One of the most stressful moments is when HMRC suggests your records are inadequate. That doesn’t automatically mean penalties or wrongdoing, but it does mean HMRC may be less willing to accept your figures at face value. If records are incomplete, HMRC may rely more on estimates. Your job then becomes to improve the evidence base quickly and reduce uncertainty.

Steps that often help include:

Reconstructing sales records: Using bank statements, processor reports, invoices, appointment logs, email confirmations, and platform dashboards to rebuild a complete picture.

Explaining gaps honestly: If you are missing records for a period due to a system change, lost device, or other reason, explain what happened and what alternative evidence you can provide.

Producing a robust reconciliation: Even if you don’t have perfect invoices, showing that bank receipts match sales sources and that non-sales receipts are identified can reduce HMRC’s concerns.

Improving systems going forward: HMRC may be reassured if you implement better bookkeeping practices and controls, demonstrating that problems were historical and addressed.

Your rights: what you can push back on

Although cooperation is important, you are not required to accept everything HMRC proposes. You have rights, and you can challenge requests or conclusions that are unreasonable or incorrect.

Reasonableness of information requests: HMRC generally must request information that is reasonably required to check your tax position. If a request is excessively broad or unclear, you can ask HMRC to narrow it or explain why it’s needed.

Time to respond: If you need more time, you can request an extension. This is common when records need to be gathered from banks or platforms.

Disputing estimates: If HMRC uses an indirect method to estimate turnover, you can challenge the assumptions and provide alternative calculations backed by evidence.

Appeal routes: If HMRC issues an assessment or amendment you disagree with, you can usually request an internal review and/or appeal to an independent tribunal, subject to time limits and procedural rules.

Even when you disagree, tone matters. Strong evidence combined with a professional, factual approach often gets better outcomes than emotional arguments or blanket denials.

What a meeting with HMRC might look like

Some turnover challenges include a meeting or call. The purpose is usually to understand your business model and walk through records. A meeting is not automatically a sign of serious trouble. However, preparation is essential.

You can expect questions like:

How do customers pay you? Do you take cash? Do you use card terminals or online payments?

How do you record sales day-to-day? What software do you use?

Who raises invoices? Are all jobs invoiced?

How do you handle refunds, discounts, and cancellations?

What checks do you do to ensure completeness—do you reconcile bank and card receipts?

Are there any other income sources, such as grants or commissions?

Before a meeting, prepare a clear explanation of your process and have key summaries ready: a turnover reconciliation, VAT reconciliation (if applicable), and any notes explaining anomalies. If you have an adviser, they can attend with you and help keep the discussion focused.

If HMRC is right: how to settle sensibly

Sometimes, after you review your records, you may conclude HMRC has a valid point and turnover was understated. If that happens, the best approach is usually to quantify the issue accurately and move to settlement.

Settlement typically involves:

Correcting the figures for the relevant period(s).

Calculating additional tax due, plus interest.

Discussing penalties and seeking reductions based on the circumstances, quality of disclosure, and cooperation.

Agreeing a payment plan if you cannot pay in one go. HMRC may accept instalments depending on your situation.

Where possible, it can help to present HMRC with a complete package: revised computations, reconciliations, and a written explanation of what caused the error and what you’ve done to prevent recurrence. This can support a more favourable penalty position because it shows transparency and corrective action.

If you believe HMRC is wrong: how to defend your turnover figure

If you believe your declared turnover is correct, your strategy is to make it easy for HMRC to see why. Often disputes continue simply because HMRC cannot reconcile the numbers from the information provided. Clarity wins.

Build your defence around:

A primary reconciliation: Declared turnover tied to invoices (or platform sales), then to bank and payment processor receipts, with clear adjustments for timing differences, refunds, and non-sales receipts.

Supporting schedules: Refund list, chargeback list, platform fee summaries, VAT bridge (if relevant), and explanation of accounting basis.

Documentation index: A simple list of attachments with filenames and descriptions so HMRC can navigate your evidence.

Consistency across taxes: If you have VAT returns, ensure the story matches. If it doesn’t, explain why (e.g., exempt sales or timing differences).

Where HMRC’s estimate is based on assumptions, challenge each assumption with facts. For example, if HMRC assumes all bank credits are sales, identify and evidence transfers, loans, director injections, refunds from suppliers, and other non-sales items. If HMRC assumes a certain mark-up, provide data showing your actual pricing structure, discounts, spoilage, or service mix.

How long does a turnover challenge usually take?

There is no single timeline. Some challenges close quickly if the issue is a straightforward reconciliation and records are complete. Others take months (or longer) if HMRC broadens the scope, if multiple years are involved, if records are missing, or if there are disputes about methodology.

You can usually shorten the process by providing complete, organised information early, responding on time, and proactively explaining what the numbers mean. If you need extra time, it’s usually better to agree a realistic extension than to miss deadlines and create friction.

How to reduce the risk of a challenge in the future

You can’t guarantee HMRC will never ask questions, but you can make it far less likely that a turnover query turns into a long dispute. The core is good bookkeeping and reconciliations.

Practical habits that help include:

Separate bank accounts: Keep business transactions out of personal accounts where possible.

Regular reconciliation: Reconcile bank, card, and platform receipts to your bookkeeping monthly, not annually.

Keep source records: Save invoices, receipts, and platform reports. Download monthly statements from payment processors; some platforms limit historic access.

Track refunds properly: Make sure refunds and chargebacks are recorded consistently, including VAT treatment where applicable.

Understand gross vs net treatment: Particularly with marketplaces, delivery apps, and agencies, understand whether you’re the principal or agent and how that affects turnover reporting.

Document your process: A simple written note of how you calculate turnover and VAT can be surprisingly useful if questions arise later.

When to get professional advice

Some turnover challenges can be handled by a confident business owner with good records, but professional advice is often worth it when:

The sums are large or HMRC is looking at multiple years.

There’s a risk of VAT registration issues or large retrospective VAT.

Your business has complex income streams (marketplaces, subscriptions, commissions, mixed VAT treatment).

Records are incomplete and you need to reconstruct turnover.

HMRC is using estimates you believe are unreasonable.

You’re worried HMRC suspects deliberate behaviour.

An adviser can help you understand what HMRC is really asking, present evidence in a persuasive way, and avoid accidental admissions or unclear explanations that create further questions.

What to remember: a challenge is a process, not a verdict

If HMRC challenges your declared turnover, it’s easy to assume the worst. But a challenge is often the start of a conversation about evidence, accounting treatment, and consistency. The outcome depends on the facts, the quality of your records, and how you respond.

The most effective approach is to treat the issue like a reconciliation exercise: gather documents, build a clear bridge from underlying sales data to the turnover figure you reported, and communicate calmly. If there is an error, disclose it accurately and focus on settling with minimal additional cost. If your figure is right, organise your evidence so HMRC can see it quickly.

Turnover is the headline number that HMRC uses to understand a business. When it’s challenged, you’re being asked to show your working. With preparation, a solid paper trail, and a structured response, you can usually bring the matter to a conclusion without it consuming your life—or your business.