What should a sole trader do if HMRC disputes their tax calculations?

What it means when HMRC disputes your tax calculations

If you’re a sole trader and HMRC disputes your tax calculations, it can feel like the ground shifts under your feet. One day you’ve filed what you believed was a correct tax return; the next, you’re staring at a letter or message suggesting your figures don’t add up, your expenses aren’t acceptable, your income looks understated, or your VAT (if registered) doesn’t match what HMRC expects. The most important thing to understand is that a dispute doesn’t automatically mean HMRC thinks you’ve acted dishonestly. In many cases, HMRC is simply asking questions, requesting evidence, or applying a different interpretation of the rules.

That said, HMRC disputes can lead to additional tax, interest, and potentially penalties. The sooner you handle the issue calmly and methodically, the better your chances of resolving it on reasonable terms. This article explains what to do step by step, how to protect yourself, how to communicate effectively with HMRC, and when to involve professional support.

Stay calm, read everything carefully, and note the deadlines

The first thing to do is slow down and read the HMRC communication properly. Disputes often arise through one of several routes: a compliance check into your Self Assessment return, a request to clarify specific figures, a “nudge” letter suggesting your return differs from typical patterns, an enquiry opening notice, or a formal assessment stating HMRC believes more tax is due. Each route comes with different timelines and rights.

Make a list of the key facts from HMRC’s letter or message:

1) What tax year(s) does it relate to?

2) What exactly is being challenged (income, expenses, capital allowances, VAT outputs/inputs, CIS deductions, cash basis vs accruals, private use adjustments, etc.)?

3) What does HMRC want you to do next (provide documents, explain a calculation, amend the return, pay an amount, or respond with reasons)?

4) What is the response deadline and how should you respond (online message, post, phone, email, or via an agent)?

Deadlines matter because missing them can escalate things unnecessarily. If you genuinely need more time to gather evidence, you can often ask for an extension, but do it promptly and in writing where possible. Even if you plan to use an accountant, you should still note the time limits now so you don’t lose options later.

Identify whether this is an enquiry, a check, or an assessment

Not every HMRC challenge is the same, and your strategy depends on what you’re dealing with. Broadly, disputes tend to fall into these categories:

Informal query or “nudge”: HMRC highlights something unusual and encourages you to review your return. This may not be a formal enquiry, but ignoring it can lead to further action. Responding with a clear explanation and evidence can sometimes end the matter quickly.

Compliance check: HMRC asks questions or requests evidence to verify information. This can be targeted to one item (for example, vehicle costs) or broader.

Formal Self Assessment enquiry: HMRC has opened an enquiry into your return, typically within a set time window. This can be limited to specific areas or be a full enquiry into the entire return.

Discovery assessment or amended assessment: HMRC asserts that tax has been underpaid and issues an assessment. There are formal routes to appeal, and strict deadlines apply.

Why does this matter? Because the tone, rights, and next steps change. For example, a formal assessment generally triggers a clear appeal process. An enquiry often becomes a series of information requests and clarifications before any final decision is made. If you aren’t sure what the letter is, look for key phrases such as “We are opening an enquiry into your tax return” or “We have charged an assessment” or “We require information under…” and treat it seriously.

Get organised: build a dispute file and a timeline

HMRC disputes are won or lost on organisation and evidence. Create a dedicated folder (digital and/or physical) and keep everything in one place. Include:

• The HMRC letter(s), envelopes (date stamps can matter), and any online messages

• Copies of the relevant tax return and computations you filed

• Your bookkeeping records for the year (sales invoices, receipts, bank statements, cash records)

• Any accounting software exports (profit and loss, transaction listings)

• VAT returns and workings if VAT is involved

• Emails with clients or suppliers that support timing or business purpose

• Notes of any phone calls (date, time, name of HMRC officer, what was said)

Then create a simple timeline document. Start with when you filed the return, what you reported, when HMRC contacted you, what they asked, and when you responded. A clean timeline helps you stay consistent and reduces the risk of contradictory explanations that can undermine your position.

Understand the common reasons HMRC disputes sole trader calculations

While every case is different, disputes often cluster around a few recurring themes. Knowing these helps you target your response.

Income omissions or mismatches

HMRC may compare your reported turnover to data they hold or receive from third parties. Disputes can arise if you missed an invoice, posted income to the wrong year, or misunderstood what counts as taxable income. If you have multiple income streams (for example, sales plus affiliate commissions plus occasional subcontracting work), it’s easy to overlook something.

Sometimes the issue is timing. Income received around the year end can be recorded differently depending on your accounting method. If you use cash basis accounting, income is generally taxed when received; under accruals, it’s recorded when earned. A mismatch between what your customer reports and what you recorded can trigger questions.

Expenses that HMRC believes are not “wholly and exclusively” for business

Many sole traders claim legitimate expenses but struggle to prove the business element. Common flashpoints include:

• Motor costs where there is private use

• Home office claims and household bills

• Phone and internet bills used personally as well

• Meals and travel that look like ordinary living costs

• Clothing that is not clearly protective or uniform

• Repairs or improvements that might be capital rather than revenue

If HMRC disputes these, your job is to show how the expense relates to earning business income, and to quantify the business portion where there is mixed use.

Capital vs revenue treatment

HMRC may challenge whether you treated an item as a day-to-day expense (revenue) when it should be treated as a capital purchase (asset) and claimed through capital allowances instead. Typical examples include equipment, tools, computers, or significant improvements to property used for business. Misclassification can change taxable profit.

Cash businesses and “life-style” questions

Cash-heavy trades can attract more scrutiny. HMRC may look for signs that takings have been understated. Sometimes they test whether your declared profits align with your living costs, private spending, or bank deposits. That doesn’t mean they are right, but it means your records need to stand up to questioning.

Errors caused by bookkeeping mistakes

Many disputes are simply the result of inconsistent categorisation, duplicate entries, missing purchase invoices, or failing to reconcile bank accounts. A common scenario is that your bookkeeping shows one thing, your tax computation shows another, and you can’t easily explain the difference. This is fixable with careful review and clear workings.

Recheck your own calculation before you argue

Before pushing back, independently verify your own figures. It’s possible you made an honest mistake. If you did, acknowledging it quickly can reduce penalties and shorten the process. Rechecking means:

• Confirm total turnover: reconcile sales records to bank statements and cash records

• Check expense totals: ensure there are receipts or invoices and that personal items were excluded or apportioned

• Review any mileage or motor calculations: confirm business percentage and method used

• Validate capital allowances: confirm qualifying assets, dates, and correct claim method

• Compare your profit figure to accounting software reports and to prior-year trends

Even if you believe you are correct, doing this homework strengthens your response. It also helps you respond with confidence and clarity rather than defensiveness.

Respond promptly and professionally: your tone matters

When HMRC disputes your calculations, your response should be calm, factual, and structured. Avoid emotional language or accusations. Don’t ignore letters, and don’t provide rushed explanations that you later have to retract. If you’re not ready to answer fully, respond to acknowledge receipt and explain when you will provide a full response.

In your response, aim to:

• Restate HMRC’s question in your own words to show you understand it

• Provide your answer and the reasoning behind it

• Attach or list evidence supporting your position

• Offer a clear working or schedule showing how you arrived at the figure

• Invite HMRC to clarify if they need something specific

When disputes drag on, they often do so because information is provided piecemeal. A single, well-organised package can move things forward faster.

Evidence: what HMRC usually wants to see

HMRC typically cares less about your “explanation” and more about whether your records support it. Good evidence includes:

Bank statements and reconciliations: showing business income receipts and business payments. If you use a personal account, separating business and personal transactions becomes more important and more labour-intensive.

Invoices and sales records: sequential invoices, point-of-sale summaries, platform reports (if you sell online), and evidence of refunds or bad debts.

Receipts and purchase invoices: ideally showing supplier name, date, amount, and what was purchased.

Contracts and engagement letters: useful to show the nature of the work, especially if HMRC disputes employment status or questions whether something is truly business-related.

Mileage logs: dates, destinations, business purpose, and miles. Consistency matters more than perfection, but vague or reconstructed logs can be challenged.

Home office calculations: how you apportioned costs (rooms, floor area, time used) or whether you used a simplified flat rate method.

Private use adjustments: calculations that remove personal portions of mixed-use costs.

The key is to show a traceable chain from source documents to bookkeeping entries to your tax return.

Don’t overshare, but don’t withhold key information either

A common mistake is providing huge volumes of irrelevant documents in the hope HMRC “finds what they need.” That can backfire, because it increases the chance HMRC spots something else to query or gets frustrated by the noise. On the other hand, withholding key evidence or being evasive can lead HMRC to assume the worst.

A practical approach is to provide:

• The documents directly relevant to the disputed item

• A summary schedule that points to specific pages or entries

• Additional evidence only if requested

If you’re sending digital documents, label them clearly (for example, “2023-24 Vehicle Costs Receipts.pdf” and “Mileage Log 2023-24.xlsx”) and refer to them explicitly in your message.

Know your rights: appeals, reviews, and tribunals

If HMRC issues a formal decision you disagree with, you may have the right to challenge it through an appeal process. The exact process depends on what HMRC has done (for example, an assessment, a penalty, or an amendment). Generally, there is a pathway that may include:

• Submitting an appeal within the stated deadline

• Requesting a review by an independent HMRC officer

• Taking the matter to a tribunal if it cannot be resolved

Even if you ultimately plan to settle, understanding that there is a formal dispute route can help you negotiate from a stronger position. Importantly, missing an appeal deadline can reduce your options significantly. If you receive a document that looks like a decision rather than a query, treat it as time-critical.

Penalties: how they work and how to reduce them

Penalties can apply if HMRC concludes that your return contained inaccuracies that led to underpaid tax. However, penalties are not automatic at the maximum level. HMRC will typically look at behaviour: whether the error was careless, deliberate, or deliberate and concealed, and whether you disclosed it unprompted or only after being challenged.

As a sole trader, you can often reduce penalties by:

• Cooperating fully and promptly

• Providing complete and accurate information

• Explaining how the error happened and what you’re doing to stop it happening again

• Making a voluntary correction if you discover a mistake

Even if you disagree with HMRC’s interpretation, you can still demonstrate good faith through transparent records and reasonable argument.

If you made a mistake: correct it quickly and cleanly

If your review shows you did miscalculate, don’t panic. Many sole traders make honest mistakes. The practical steps are:

• Calculate the correct figure and the difference in tax

• Prepare a clear explanation of what went wrong

• Provide updated workings and evidence

• Follow HMRC’s process for amending the return or agreeing an adjustment

The goal is to resolve the matter efficiently while minimising additional costs. Trying to defend an error that can be clearly demonstrated is rarely worth it; it tends to prolong the enquiry and may affect how HMRC views your cooperation.

If you believe you are correct: present a structured argument

Sometimes HMRC’s position is based on an assumption, an incomplete picture, or a different view of the rules. If you believe your calculation is correct, respond with a structured case rather than a simple “I disagree.”

A strong response often includes:

• A short summary of the issue and your conclusion

• The calculation steps you used

• The evidence supporting each step

• Any relevant explanation of how your business operates (for example, why certain costs are necessary)

• A clear request for HMRC to confirm whether their dispute is based on a specific point

For example, if HMRC disputes travel costs, show the itinerary, client meetings, and receipts, and clarify why the travel was necessary. If they dispute motor expenses, show mileage logs or business-use percentage calculations. If they dispute income, reconcile invoice lists to bank receipts and explain timing differences.

Be careful with phone calls: follow up in writing

Calling HMRC can be useful to clarify what they’re asking for or to confirm process steps. However, phone calls can also lead to misunderstandings, especially when complex calculations are involved. If you do speak to HMRC, make notes during the call and follow up in writing with a short summary of what was agreed or requested.

A useful format is:

• Date/time of call

• Name (or identifier) of HMRC officer

• What you asked

• What HMRC said they need

• What you will provide and by when

This protects you if the case later changes hands or if there is a disagreement about what was said.

Consider professional help early, not only when things get worse

You don’t have to face HMRC alone. A good accountant or tax adviser can help you understand what HMRC is really challenging, present your case in the right language, and ensure you’re not accidentally admitting something you don’t mean to admit. They can also take over communication, which reduces stress and often improves clarity.

Professional support may be especially helpful if:

• The amounts involved are significant

• HMRC suggests penalties or alleges deliberate behaviour

• The dispute covers multiple years

• You have incomplete records and need to rebuild them

• The issue involves complex areas like capital allowances, VAT, or status matters

If you can’t afford full representation, some advisers offer limited-scope help, such as reviewing your response letter, checking your calculations, or advising on how to present evidence. Even a short consultation can prevent costly missteps.

If your records are incomplete: rebuild them methodically

Sometimes HMRC disputes arise because record-keeping was weak. If you don’t have all receipts, invoices, or logs, focus on reconstructing the records as credibly as possible. This can include:

• Requesting duplicate invoices from suppliers

• Downloading transaction histories from banks and payment processors

• Pulling platform sales reports (online marketplaces, booking platforms, card payment systems)

• Using emails and order confirmations to corroborate purchases

• Building a schedule of income and costs from available evidence

Be honest about what you have and what you don’t. If certain evidence is genuinely unavailable, explain why and provide alternative support. HMRC may still disallow some items if evidence is insufficient, but a careful reconstruction can reduce the damage and show you are cooperating.

Manage cash flow: plan for the possibility of additional tax

While you’re disputing calculations, you should also plan for the financial side. If HMRC believes you owe additional tax, it may request payment or issue an assessment. Even if you intend to appeal, consider setting aside funds where possible. Cash flow planning reduces panic decisions later.

If you can’t pay what HMRC claims is due, it may be possible to request a time-to-pay arrangement. The best time to discuss payment options is before arrears spiral. If you are facing genuine hardship, early communication and a realistic proposal can be better than silence.

Keep your messaging consistent: one version of the truth

Disputes can become messy when your story changes over time. For example, you might say an expense was “travel to a client meeting,” later describe it as “training,” and later still say it was “a networking event.” Even if all of these are partially true, inconsistency can create doubt.

Decide your narrative based on the evidence, and stick to it. If you later discover new facts, explain that you have found additional information and correct the record clearly. Honest correction is better than quiet contradiction.

Use simple schedules to explain complex figures

HMRC officers deal with many cases. If you can make your figures easy to follow, you increase your chances of being understood and taken seriously. Schedules are your friend. For example:

Income reconciliation schedule: invoice number, date, amount, payment date, bank reference, and total, matched to turnover reported.

Motor expenses schedule: total costs by category (fuel, insurance, repairs), business-use percentage, private use adjustment, net claimed.

Home office schedule: costs (rent/mortgage interest element where applicable, utilities, internet), apportionment basis, business percentage, net claimed.

Capital allowances schedule: asset description, purchase date, cost, allowance claimed, business use percentage, total claimed.

Even a one-page table can transform a confusing dispute into a straightforward conversation.

Be aware of related issues that can surface

HMRC disputes can sometimes expand. If HMRC starts with one item and then notices broader problems, it may ask for additional information. This is another reason to respond with well-prepared evidence and a coherent picture of your business.

Common “related issues” include:

• VAT: input VAT claimed on items with private use, or VAT on sales not declared correctly

• CIS: treatment of contractor deductions or subcontractor payments

• Employment status: whether income should be treated differently

• Record-keeping adequacy: whether your records meet expectations

This isn’t meant to scare you, but to encourage a disciplined approach: resolve the immediate dispute while ensuring your broader bookkeeping is defensible.

How to handle HMRC requests for information

HMRC may request documents, explanations, or access to records. Responding well means being clear, timely, and precise.

Confirm what is being requested: If the request is vague, ask for clarification. It’s better to clarify than to send the wrong thing.

Provide copies, not originals: Unless HMRC specifically requires originals, keep your originals safe. For digital records, keep backups.

Redact irrelevant personal data carefully: If you share bank statements containing personal transactions, you may feel tempted to redact heavily. Be careful: over-redaction can look evasive. A better approach is to provide business bank statements where possible. If you only have a personal account, consider highlighting business items rather than blacking out everything else, unless sensitive data is genuinely unnecessary.

Log what you send: Keep a list of documents provided and when. If posting, use a method that provides proof of delivery where appropriate.

When HMRC’s dispute is based on assumptions: challenge the assumptions

Sometimes HMRC disputes are driven by benchmarking or risk indicators, such as “your expenses are high relative to turnover” or “your profit margin is lower than typical.” These indicators can prompt questions, but they do not prove an error. Many businesses have legitimate reasons for unusual patterns: startup years, one-off equipment purchases, changes in pricing, illness, time off, a shift from subcontracting to direct work, or investment in marketing.

If HMRC’s dispute seems assumption-based, respond by explaining the commercial reality of your business. Use specifics: what changed, when, and why. Then support it with evidence, such as invoices for equipment, marketing campaigns, or contracts showing reduced working hours.

If HMRC proposes a settlement figure: evaluate it carefully

HMRC may propose adjustments and invite you to agree a revised taxable profit. Don’t accept a figure just to make the stress go away without checking it. A settlement might still be reasonable, but you should understand:

• What items are being adjusted

• Whether the adjustment is correct in principle

• Whether the evidence supports your original claim

• The tax impact, including National Insurance where relevant

• Any penalties and how they are calculated

Sometimes the best outcome is a negotiated agreement where you concede weak items (for example, expenses without evidence) while protecting stronger parts of your return. If you are uncertain, professional advice can pay for itself by preventing you from accepting an unnecessarily high adjustment.

Prepare for the long game, but aim for a quick resolution

Some disputes resolve quickly; others take months. You should approach the matter with patience and structure. The “quick resolution” route usually means: clear evidence, clean schedules, prompt responses, and professional tone. The “long game” preparation means keeping meticulous records of every interaction and being ready to escalate through formal review or appeal if needed.

To stay in control during a longer dispute:

• Maintain your timeline document and update it after each interaction

• Keep copies of everything you submit

• Track deadlines and set reminders

• Avoid repeated informal phone calls without written follow-up

• Continue running your business and keep current-year records strong

Improve your systems now to prevent repeat disputes

Even while a dispute is ongoing, you can reduce future risk by improving how you track income and expenses. HMRC disputes often reveal weaknesses in record-keeping or processes. Practical improvements include:

Separate bank account: Use a dedicated business account so income and expenses are clearly identifiable.

Regular reconciliations: Reconcile bank feeds monthly and resolve discrepancies promptly.

Receipt capture: Use an app or simple routine to store digital copies of receipts and invoices as you receive them.

Clear expense categories: Decide consistent categories and rules, especially for mixed-use items.

Mileage tracking: Record mileage as you go, not months later.

Quarterly review: Check profit trends, tax estimates, and unusual items before the year end.

These steps don’t just help with HMRC; they help you understand your business better and plan cash flow.

Practical step-by-step action plan for a sole trader

To pull everything together, here is a practical sequence you can follow if HMRC disputes your tax calculations:

Step 1: Read the HMRC communication carefully, identify what is being questioned, and note deadlines.

Step 2: Create a dispute folder and timeline. Save all messages and documents.

Step 3: Pull the filed tax return, computations, and bookkeeping reports for the year.

Step 4: Recheck your own figures independently: reconcile income, confirm expenses, review mixed-use and capital items.

Step 5: Gather evidence specifically related to the disputed items, and create a simple schedule explaining your workings.

Step 6: Draft a calm, structured response. Answer the questions asked, attach evidence, and avoid irrelevant material.

Step 7: If you discover an error, correct it promptly and explain it clearly. If you believe you are correct, present your reasoning and evidence concisely.

Step 8: Keep notes of any calls and follow up in writing.

Step 9: If a formal decision is issued, consider appeal deadlines and whether to request a review or escalate.

Step 10: Improve your bookkeeping systems to reduce future risk and demonstrate good compliance behaviour.

Final thoughts: focus on clarity, evidence, and timeliness

When HMRC disputes a sole trader’s tax calculations, the situation is serious but manageable. Most outcomes depend on how clearly you can demonstrate the truth of your numbers. If your return is correct, strong records and a structured explanation can bring HMRC to agreement. If your return contains mistakes, correcting them early and cooperating fully can reduce penalties and stress.

Think of it as a practical problem to solve: identify the disputed points, rebuild the calculations, support them with evidence, and communicate professionally. If the dispute becomes complex or high-stakes, bring in professional help sooner rather than later. Above all, treat deadlines as non-negotiable and keep everything documented. With a methodical approach, you can navigate an HMRC dispute without it derailing your business.