What should a sole trader do if HMRC questions their bookkeeping methods?

What it means when HMRC questions your bookkeeping methods

If you are a sole trader and HMRC questions your bookkeeping methods, it can feel unnerving—especially if your records are mostly “good enough” in your own eyes, or if you have been doing things the same way for years. In practice, an HMRC query about bookkeeping is usually less about catching you out and more about understanding whether your business records are complete, accurate, consistent, and capable of supporting the figures on your Self Assessment tax return. HMRC wants confidence that your income has been fully declared and that your expenses are genuine, allowable, and properly evidenced.

Sometimes HMRC raises questions because something on your return looks unusual compared to your past figures, your industry norms, or other data HMRC holds. In other cases, they may be reviewing a wider category of taxpayers or following up on information from third parties. The “question” might be as simple as a request to explain an entry, provide receipts, or show how you calculated your turnover. Or it could be part of a more structured compliance check where they ask for books and records, bank statements, invoices, and explanations of your systems.

The key point is this: how you respond matters. Calm, organised, and cooperative responses typically lead to quicker resolution and fewer follow-up questions. Disorganised, defensive, or vague replies often prolong the process and can broaden HMRC’s interest. The goal is not to “win an argument”; it is to demonstrate that your records can be relied upon and, where needed, to correct mistakes promptly and transparently.

Stay calm and treat it like a process, not a crisis

The first thing a sole trader should do is slow down. HMRC communications can trigger a rush of anxiety that leads to rushed replies, missing documents, or statements that are not fully thought through. Instead, read the letter or message carefully and identify exactly what HMRC is asking for. Is it a specific transaction, a period of time, a particular category of expenses, or your overall bookkeeping approach? Often, the request will include a deadline and a method for replying.

It is sensible to create a simple “HMRC query” folder (digital or paper) and keep everything related to the enquiry together: HMRC letters, your replies, supporting evidence, and a running note of phone calls (date, time, who you spoke to, and what was agreed). This is useful not only for the current issue but also as evidence of cooperation and good faith if HMRC later asks about timelines or prior responses.

If you are genuinely struggling to meet a deadline—for example, you are ill, away, or your records are held by someone else—address it early. A short, factual request for more time, with a clear reason, is usually better received than missing the deadline and trying to explain later. The aim is to show that you are engaged and taking the enquiry seriously.

Understand what HMRC is really testing

When HMRC questions your bookkeeping methods, they are typically testing a few core things. First, completeness: have you recorded all business income, including cash, card payments, bank transfers, online platform payments, tips, commissions, or ad revenue? Second, accuracy: do your records match reality, and do they reconcile to bank statements and payment processor statements? Third, evidence: can you support your figures with invoices, receipts, and clear explanations of what each transaction was for? Fourth, consistency and logic: do your methods make sense for your type of business, and are they applied consistently across the year?

HMRC is also interested in whether your record-keeping meets legal requirements and supports a correct tax calculation. That does not necessarily mean you must use a particular software package or be a bookkeeping expert. Many sole traders use spreadsheets, basic accounting apps, or even manual systems. The issue arises when the method results in gaps, unclear categorisation, missing supporting documents, or figures that cannot be followed from source documents to totals on the return.

Another common focus is the boundary between business and personal spending. If you use a personal bank account for business transactions, HMRC may pay closer attention, because mixing transactions increases the chance of omissions or mistakes. If you claim home working, mileage, or mixed-use expenses (like phone and broadband), HMRC may ask how you calculated the business proportion and whether it is reasonable.

Gather and organise your records before you reply

A practical step is to assemble your evidence before writing any explanation. If HMRC asks about a specific period, pull together the bank statements for that period, your sales invoices, purchase receipts, and any bookkeeping reports or spreadsheets you used to prepare the return. If you use bookkeeping software, export the relevant reports (profit and loss, transaction lists, and any audit trail if available). If you operate partly in cash, gather your cash log, till reports, invoice book copies, or any notes that show how cash income was tracked.

Organisation is your friend here. A well-labelled set of documents reduces the need for lengthy narrative. For example, if HMRC asks about turnover, you might prepare a simple reconciliation that shows how turnover on the return equals the total of invoices or sales reports, adjusted for refunds or timing differences if applicable. If they ask about expenses, you can group receipts by category and provide a summary showing totals and examples.

Where you have gaps—missing receipts, incomplete logs, or uncertain categorisation—note them privately first. Do not ignore them. You can often address issues with alternative evidence (like bank transaction records) or by correcting errors. HMRC generally responds better to honesty and solutions than to attempted concealment or confident assertions that later unravel.

Check the scope: is this a simple query or a compliance check?

HMRC may ask an informal question, or they may open a more formal check into your return. The tone and wording of their communication usually indicates the level. A simple query might ask you to clarify one or two items. A compliance check is broader and may request a range of records and explanations. Understanding which it is helps you respond appropriately and decide whether you need professional support.

If the request is narrow, respond narrowly and clearly, supplying what is asked for and no more. If HMRC is reviewing your overall bookkeeping methods, you may need to provide a description of how you record income and expenses, how you store receipts, how you reconcile to bank accounts, and how you ensure the completeness of your records. In either case, keep your response structured, factual, and easy to follow.

If you are unsure about the status of the enquiry, you can ask HMRC directly what they are checking and which tax years or areas are within scope. This is not confrontational; it is a reasonable request to ensure you supply the right information.

Explain your bookkeeping method in plain English

If HMRC questions your bookkeeping methods, a clear explanation often helps. Think of it as describing your system to someone who has never seen your business. For instance, you might explain that you issue invoices using an online invoicing tool, record income when it is received, download monthly bank statements, and enter expenses from receipts into a spreadsheet. Or that you use bookkeeping software and reconcile the bank feed monthly, matching transactions to invoices and receipts.

Key points to cover include how often you update records, how you ensure all income is captured, how you store receipts, and how you handle cash. Also explain any controls you use, even if informal—such as checking totals against bank deposits, or cross-referencing platform payouts against sales reports. If your method changed during the year, say why and how you ensured continuity.

Avoid jargon that can confuse the matter. HMRC officers are trained, but your clarity is what makes it easy for them to see that your approach is reasonable. A simple flow like “invoice issued → payment received → entered into records → reconciled to bank statement → totals used in tax return” can be very effective.

Be careful about “cash basis” and timing differences

A common area of confusion for sole traders is the timing of income and expenses: when they are counted for tax purposes and how that links to the bookkeeping method. Some sole traders record income and expenses based on payments in and out (cash basis), while others use traditional accounting (accruals), where you record income when it is earned and expenses when they are incurred. If HMRC questions your bookkeeping, it can be because they see timing differences that suggest inconsistent application.

You do not need to write an essay on accounting rules, but you should be clear about the basis you use and apply it consistently. If you record sales when you are paid, you should generally record expenses when you pay them, unless there is a specific reason and the rules allow otherwise. If you invoice in one month and get paid the next, your income may look “lumpy” and raise questions. A short explanation that your income follows payment dates can resolve confusion quickly.

Similarly, if you have deposits, refunds, retentions, or advance payments, explain how you treated them. If you made a one-off purchase (like a laptop or equipment), HMRC may ask how you claimed it and whether it is business use. Having a clear treatment and supporting documentation helps.

Reconcile your records to bank statements and payment platforms

One of the strongest ways to reassure HMRC is to show that your bookkeeping ties back to independent records. Bank statements, card machine statements, PayPal or Stripe reports, online marketplace payouts, and other platform summaries are all helpful. A reconciliation does not need to be complex. For example, you might total all incoming business receipts shown on bank statements for the year and compare it to the turnover figure in your accounts, explaining any differences (such as owner injections, loans, transfers between accounts, refunds, or timing issues).

If you have multiple streams of income, break them down: direct bank transfers, cash deposits, card payments, and platform payouts. When your figures are supported by reconciliations, HMRC often has less reason to doubt the completeness of your records.

If you have not reconciled before, do it now. It can be time-consuming, but it is often the turning point between a drawn-out enquiry and a quick conclusion. It also helps you identify mistakes early and correct them properly.

Address missing receipts and evidence thoughtfully

Missing receipts are common, especially for small cash purchases or older transactions. HMRC understands that documents can be lost, but they expect you to keep records and make reasonable efforts to evidence claims. If you cannot produce a receipt, consider what alternative evidence you have: a bank statement transaction, an email confirmation, a supplier invoice copy, or a screenshot from an online account. You can also obtain duplicate invoices from suppliers in many cases.

Be careful not to “recreate” receipts in a way that looks like fabrication. If you are producing alternative evidence, label it honestly as such. If you made an estimate for certain costs, recognise that estimates are risky and may be challenged. Where possible, replace estimates with actual evidence. If you must use an estimate, be clear on how it was calculated, why it is reasonable, and whether you have partial evidence.

Also be mindful that the absence of receipts can be a sign to HMRC that records are unreliable, which can lead to wider scrutiny. If you have a pattern of missing evidence, it may be worth reviewing your record-keeping process immediately and making changes you can describe to HMRC as improvements.

Focus on allowability of expenses and the “wholly and exclusively” principle

When HMRC looks at bookkeeping methods, they often also look at whether expenses have been claimed correctly. Sole traders can generally deduct expenses that are incurred wholly and exclusively for the purposes of the business. The practical challenge is mixed-use expenses—costs that are partly personal and partly business. Common examples include phone bills, home broadband, home office costs, vehicle expenses, and subscriptions that have both personal and business elements.

If HMRC questions your methods, be ready to explain your approach to these mixed expenses. For example, if you claim a proportion of your phone bill, how did you determine the business percentage? If you claim home working, did you use a simplified method or actual costs? If you claim mileage, do you keep a log showing business journeys? The more transparent and reasonable your method, the less likely HMRC is to argue.

Avoid the temptation to justify an expense only with “everyone in my industry does it.” HMRC cares about the rules and your evidence. If you spot expenses that are weakly supported or arguably personal, take advice and consider correcting them.

Be careful with mileage, vehicle costs, and travel claims

Vehicle and travel claims are frequent areas of HMRC attention because they are easy to get wrong. If you claim mileage, keep a record that shows dates, start and end points, purpose, and miles. If you claim actual vehicle costs, you need to be very clear on business versus personal use and how you calculated the business proportion. Switching methods without understanding the implications can also cause issues.

HMRC may question your bookkeeping if your vehicle expenses look high relative to your turnover or if the pattern of claims seems inconsistent. If that happens, respond with your log and calculations. If you do not have a log, start one now and reconstruct past journeys where possible using diaries, calendars, job records, or mapping history. Reconstructed records are not as strong as contemporaneous ones, but they are better than nothing, and they show effort and transparency.

For travel and subsistence, ensure that claims relate to business journeys and are not ordinary commuting. Where you meet clients, attend sites, or travel to temporary workplaces, keep notes that link the expense to the business purpose. If your bookkeeping method currently just labels items “travel” without detail, consider adding more description going forward.

Respond in writing, clearly, and keep a copy of everything

When replying to HMRC, write in a calm, structured way. Address each question in order. Provide documents that directly support your answers. Use simple labels and a contents list if you are sending multiple files. If you are posting paper copies, keep originals where possible and send copies, unless HMRC specifically requests originals.

Keep a complete copy of whatever you send. If you upload documents, save a copy of the upload confirmation or reference number. If you speak to HMRC by phone, follow up with a brief written summary where appropriate, especially if any deadlines or next steps were agreed.

A strong reply often includes: a short overview of your bookkeeping method, direct answers to the specific questions, supporting documents, and a brief explanation of any discrepancies or corrections. Avoid emotional language. Avoid speculation. If you do not know an answer, say you are checking and will revert, rather than guessing.

Correct mistakes proactively and transparently

It is possible that HMRC’s questions will reveal a mistake in your bookkeeping or tax return. The mistake might be innocent: a duplicated expense, missing income from a platform payout, miscategorised costs, or using the wrong basis for timing. The worst approach is to hope it will not be noticed. If you spot an error, address it openly and take steps to correct it.

Corrections might involve amending your tax return or agreeing an adjustment. The appropriate approach depends on the nature and scale of the issue and the stage of the enquiry. The general principle is that voluntary disclosure and cooperation tend to reduce the risk of penalties compared to an issue that HMRC discovers and believes you tried to hide.

When you explain a mistake, keep it factual: what happened, why it happened, what the correct figure should be, and what you have done to prevent it happening again. This is also where improving your bookkeeping process can be helpful, because you can demonstrate that you are learning and tightening your controls.

Know when to get professional help

Many sole traders can respond to simple HMRC questions themselves, especially if they have tidy records and the query is narrow. But there are situations where professional help is sensible. If HMRC is opening a broader check, if large sums are involved, if you feel out of your depth, or if you suspect your records have significant weaknesses, consider engaging an accountant or tax adviser.

A professional can help you interpret what HMRC is asking, prepare a coherent response, ensure you provide the right evidence, and avoid accidentally widening the scope by oversharing. They can also help you assess whether your bookkeeping method meets expectations and what changes to make. If you already have an accountant, let them know immediately and share the HMRC letter.

Even if you do not hire someone to manage the entire enquiry, you can sometimes pay for a limited review: an adviser checks your records, points out risk areas, and helps you draft a response. For many sole traders, that targeted support is enough to feel confident without the cost of full representation.

Improve your bookkeeping method so the same issue does not repeat

Whether the HMRC enquiry ends quickly or not, take it as a prompt to improve your bookkeeping method. HMRC’s questions often highlight the areas where your system is unclear or fragile. Improving does not need to be dramatic; small changes can make your records far more defensible.

Consider separating business and personal finances by using a dedicated business bank account. This simple step makes it easier to reconcile and to show that all business income is captured. If you receive payments through platforms, schedule a monthly download of platform statements and keep them in a consistent folder structure. If you use cash, keep a regular cash log and reconcile it to bank deposits.

Move toward a routine. For example: each week, record income and expenses; each month, reconcile to bank statements; each quarter, review categories and check for missing receipts; at year-end, run a final reconciliation and ensure your totals match your return figures. HMRC is reassured by routine and consistency.

Build an audit trail you can explain

An “audit trail” is simply the ability to follow a figure from your tax return back to the underlying records. HMRC questions arise when the audit trail is broken. If your bookkeeping is a spreadsheet, make sure it clearly shows transaction dates, descriptions, amounts, and categories, and that you can link items to invoices or receipts. Use references where possible, such as invoice numbers or receipt file names.

If you use bookkeeping software, ensure you attach receipt images to transactions where possible and keep notes for unusual items. Reconcile regularly so that the software’s numbers match your bank. Keep copies of year-end reports and the working papers you used to prepare your tax return.

When you make adjustments—such as apportioning home costs or adjusting for private use—document the calculation. A short note is often enough. The aim is that, if asked a year later, you can still explain how you arrived at the number.

Handle cash income with extra care

Cash-based businesses often receive more HMRC attention because cash is harder to trace than banked income. If you take cash, your bookkeeping method needs to show how you record cash takings, how you store the cash, how you pay cash expenses, and how you bank cash. A simple daily or weekly cash log can go a long way.

If you are questioned about cash, be prepared to show how you arrived at your cash income totals. This could include till rolls, appointment logs, delivery records, job sheets, or diaries that support the level of activity in your business. HMRC might compare your declared income to indicators like working hours, typical pricing, and business capacity. If your records do not match your activity, it can raise flags.

Even if you have historically been casual about cash records, you can improve now. Start keeping a consistent cash record and, if needed, explain to HMRC that you have tightened the process going forward. While it does not rewrite the past, it shows you are taking compliance seriously.

Prepare for common HMRC follow-up questions

Once HMRC starts questioning bookkeeping, they may ask follow-up questions. Preparing for them helps you respond quickly and consistently. Common areas include: why your profit margin changed significantly; why expenses increased; how you decided a cost was business-related; how you calculated home office claims; how you handled personal use of business assets; whether you have other income streams; and how you ensure completeness of cash and platform income.

Another common theme is lifestyle and drawings. If your business profits seem low but you appear to fund a lifestyle that suggests higher income, HMRC may ask how you support yourself. There can be innocent explanations—savings, loans, a partner’s income, or prior-year profits—but it is important to answer carefully and factually, ideally with evidence where appropriate.

HMRC may also ask about record retention and where documents are stored. Be ready to explain your storage approach: cloud folder, email archive, app attachments, or paper filing. If records are scattered across devices and accounts, consolidate them now so you can respond efficiently.

Do not over-share, but do not withhold what is asked for

There is a balance to strike. If HMRC requests specific documents, provide them. If they ask how you arrived at a figure, show the calculation. But avoid sending huge volumes of unrelated material “just in case.” Over-sharing can create confusion, generate more questions, and increase the chance that HMRC notices an unrelated issue that would otherwise not be within scope.

At the same time, do not play games with omissions. If HMRC asks for bank statements for a period, send the full statements, not selectively cropped pages, unless HMRC explicitly allows redaction of non-business items. If you feel uncomfortable sharing personal transactions, this is one reason a separate business account helps. If you must share mixed statements, consider seeking professional advice on what can be redacted and what should not be.

Accuracy and completeness in responding to the specific request is usually the best approach. If you do not have something, say so and explain what you do have and what steps you are taking to retrieve or reconstruct it.

Keep your tone cooperative and professional

HMRC enquiries are easier when the relationship is constructive. This does not mean you must agree with everything HMRC says, but it does mean you should communicate respectfully and avoid emotional escalation. A cooperative tone signals that you are trying to resolve the matter, not obstruct it.

Use short paragraphs, headings, and numbering. Refer to HMRC’s questions directly. If you disagree with a point—perhaps HMRC is misunderstanding your business model—explain calmly with evidence. For instance, if your profit margin is low because you subcontract most of the work, show invoices and subcontractor costs. If your income is seasonal, provide a short explanation and, if helpful, a month-by-month summary.

If you feel tempted to argue, pause and ask yourself: what evidence would persuade a neutral reader? Then focus on providing that evidence, rather than pushing emotion.

What if HMRC believes your records are inadequate?

Sometimes HMRC may indicate that they consider your bookkeeping inadequate. This can happen if you cannot provide evidence for key figures, if there are unexplained discrepancies, or if your system does not capture income reliably. In such cases, HMRC may seek to make adjustments, and in some scenarios they may use estimates based on available information. That is why improving the audit trail and reconciliation is so important—your aim is to avoid being put in a position where HMRC fills in the blanks.

If HMRC challenges your record-keeping, respond by strengthening what you can: provide reconciliations, alternative evidence, clearer explanations, and documented calculations. If there are genuine weaknesses, acknowledge them and set out concrete improvements. For example: “Previously I did not reconcile monthly; I now reconcile at the end of each month and store platform statements in a dedicated folder.” Specific improvements are more credible than vague promises to “do better.”

Where the dispute is about judgement—such as a business-use percentage—demonstrate reasonableness. Show how you calculated it and why it reflects real use. Being able to show thought and method often matters as much as the precise number.

Practical steps for a stronger bookkeeping system going forward

After you have dealt with the immediate HMRC questions, invest time in making your bookkeeping easier and more robust. Choose a system that fits your business and your habits, because consistency matters more than complexity. If software makes you more likely to keep up to date, use software. If a spreadsheet is what you will reliably maintain, then make it structured and backed by organised evidence.

Create a consistent file naming and storage method for receipts and invoices, such as “2025-04-12_SupplierName_£45.00_Stock.pdf” and keep them in folders by month. If you prefer, store them by category. The key is that you can find them quickly. If you receive receipts via email, create a label or folder and file them immediately.

Set recurring reminders in your calendar for bookkeeping tasks. Weekly is often ideal for sole traders because it prevents backlog. Monthly reconciliations reduce end-of-year panic. A simple checklist—enter income, enter expenses, chase missing receipts, reconcile bank, export and save reports—can keep things on track.

Finally, keep brief notes for unusual transactions. If you pay for something that might look personal, note the business purpose at the time. If you buy equipment used partly at home, record your business-use rationale. These small notes become invaluable if HMRC asks questions months or years later.

How to conclude the enquiry on the best possible terms

When HMRC’s questions are answered, they may confirm that no change is needed, request an amendment, or propose an adjustment. Your aim is to reach the correct outcome with as little stress and disruption as possible. If HMRC proposes an adjustment you agree with, respond promptly and keep records of the agreement. If you disagree, set out your reasons clearly with evidence and keep the focus on facts, not feelings.

If you have corrected issues and improved your bookkeeping, say so. HMRC generally values compliance behaviour. Demonstrating that you have tightened your systems can reduce future risk and helps show that any problems were not deliberate.

Most importantly, use the experience as a reset. HMRC questioning your bookkeeping methods is not necessarily a sign that you have done something wrong; often it is a signal that your system needs to be clearer and better evidenced. A sole trader with organised records, a consistent method, and a clear audit trail is in a much stronger position—both for HMRC enquiries and for running the business with confidence.