What should a sole trader do if HMRC questions their turnover figures?

What to do first when HMRC queries your turnover

When HMRC questions your turnover figures, it can feel personal, even if it’s “just a letter”. For a sole trader, turnover is the headline number that influences income tax, National Insurance, VAT (if registered), and often whether HMRC believes your accounts are credible. A query doesn’t automatically mean you’ve done anything wrong. It usually means HMRC has spotted something that doesn’t match their data, doesn’t align with your previous returns, or doesn’t appear consistent with your business profile.

The best starting point is to slow down and approach the situation like a project: understand what HMRC is asking, gather your evidence, check your records, and respond clearly and on time. Panic leads to rushed replies, half-evidence, or accidental contradictions. Those things create bigger problems than the original query.

If you’re a sole trader, you are personally responsible for the return, even if an accountant prepared it. That doesn’t mean you must handle everything alone, but it does mean you should be organised, truthful, and careful about what you submit.

Understand what HMRC is really asking

HMRC communications vary. Sometimes it’s an informal “check” letter asking for clarification. Other times it’s a formal enquiry. The tone and headings matter. Read the letter twice and identify:

1) Which tax year or period is being queried.

2) Exactly what figure or issue is in question (total turnover, specific months, cash sales, VAT taxable turnover, platform income, bank deposits, or a mismatch against third-party data).

3) Whether HMRC has asked for specific documents.

4) The deadline for responding and any reference numbers.

Many people reply defensively to the wrong point. If HMRC is querying “turnover” they may be concerned about missing sales, but they could also be seeing turnover that looks too low compared with your industry, or too low compared with bank activity. A vague response like “my turnover is correct” doesn’t help. You need to explain how you calculated it and provide the evidence chain.

Check the deadline and don’t ignore the letter

Ignoring HMRC rarely makes anything better. Deadlines exist for a reason, and failing to respond can escalate the situation, increase stress, and potentially increase penalties if HMRC believes you are obstructing the process. If the deadline is tight and you need time to gather records, respond before the deadline to acknowledge the letter and request additional time. Keep it polite and practical: you’re not arguing; you’re managing logistics.

Send replies using the method HMRC requested (online portal, post, or secure message if applicable). If posting, use a tracked service and keep proof of posting. Keep a copy of everything you send, including attachments and screenshots of uploads.

Decide whether you should get professional help

If the query is straightforward and your records are solid, you may be able to respond yourself. But consider involving a qualified accountant or tax adviser if:

- HMRC indicates a formal enquiry rather than a simple request for clarification.

- Your records are incomplete, messy, or spread across multiple accounts and platforms.

- You have cash sales, multiple revenue streams, or industry-specific complications.

- You suspect you made an error on the return.

- HMRC is questioning lifestyle indicators (for example, spending that seems inconsistent with declared income).

Professional help can improve the quality and structure of your response, reduce the risk of saying something unhelpful, and ensure you understand your rights and responsibilities. If you do appoint an agent, make sure they can correspond with HMRC on your behalf and that you provide them with full information. Holding back details from your adviser is a common mistake that leads to weak responses and later surprises.

Reconcile your turnover from the ground up

Before you respond, rebuild your turnover calculation in a way that you can explain and defend. Think of it as a “turnover working paper” you could hand to someone else and they would understand how you arrived at the figure.

Start with your sales sources, for example:

- Invoices you issued

- Online platform sales (marketplaces, app stores, delivery apps, freelance platforms)

- Card machine reports

- Cash sales logs or till reports

- Bank transfer receipts

- Payment processors (PayPal, Stripe, Square, etc.)

For each source, produce a list or summary by month and then total it. Then reconcile it to bank deposits (where relevant). Not every sale lands in your bank (some may be taken in cash, some may be held by a platform, some may be net of fees), but you should be able to explain the differences clearly.

A useful approach is to build a simple reconciliation:

- Gross sales per invoices/platform reports

- Less platform fees/transaction charges (not part of turnover if deducted before you receive funds, depending on how you record it)

- Equals net receipts expected

- Compare to bank deposits from that platform/processor

- Identify timing differences (end-of-month payouts, refunds, chargebacks)

This is often where the “mystery” disappears. Many HMRC queries arise because your return shows a turnover number that doesn’t match the pattern of bank credits, or because platform income was reported gross or net inconsistently.

Common reasons HMRC queries turnover

Understanding the most common triggers helps you frame your response and anticipate what HMRC may want to see.

Mismatch with third-party data

HMRC receives information from multiple sources. Depending on your work, this might include payment processors, banks, platforms, or industry schemes. If their data suggests higher receipts than declared turnover, they may ask you to explain. Sometimes their data is gross receipts and your accounts are net of fees; sometimes it includes VAT and your turnover figure is net of VAT; sometimes it includes non-business transfers that passed through your account.

Large changes year-to-year

A sharp drop or rise in turnover compared with previous returns can trigger questions. That doesn’t mean it’s wrong. It may reflect business growth, a new contract, a period of illness, pricing changes, loss of a major client, or changing market conditions. HMRC generally expects you to be able to explain the story behind the numbers.

Bank deposits exceed declared sales

If your bank account shows regular deposits that are inconsistent with declared turnover, HMRC may suspect undeclared income. However, bank deposits can include loans, transfers between accounts, personal gifts, refunds, insurance payouts, and other non-trading items. Your job is to classify and evidence which deposits relate to business sales and which do not.

Cash-based businesses and records

Cash-heavy businesses attract more scrutiny because cash is harder to track and easier to understate. If you trade in a sector where cash is common, HMRC may ask to see daily takings records, till rolls, booking systems, or appointment diaries. Good recordkeeping is your best defence.

VAT and turnover confusion

If you’re VAT registered, “turnover” can mean different things depending on context: VAT-inclusive sales, VAT-exclusive sales, or taxable turnover for registration thresholds. HMRC might be comparing a VAT return figure with your Self Assessment return. Differences can be legitimate, but you must explain them (for example, VAT periods not matching the accounting year, VAT adjustments, zero-rated supplies, or cash accounting timing).

Errors and omissions

Sometimes the answer is simple: you missed an invoice, duplicated a figure, allocated a sale to the wrong year, or excluded platform income you didn’t think counted. The key is to identify issues before HMRC does and correct them properly.

Gather the evidence HMRC is likely to expect

HMRC typically wants to see source evidence and a clear trail from that evidence to the numbers on your return. Depending on the query, the most helpful documents include:

- Sales invoices and an invoice register

- Bank statements for the relevant period

- Payment processor statements and payout summaries

- Online platform earnings summaries

- Cashbook or daily takings sheets

- Till Z-reports, card machine reports

- Booking system reports or job sheets

- Credit notes and refund records

- VAT returns and workings (if VAT registered)

- Your bookkeeping reports (profit and loss, sales ledger)

Do not “data dump” hundreds of pages unless requested. It’s better to provide a structured pack: a summary reconciliation plus the key documents that support it. If HMRC asks for full statements, provide them, but still include a summary explaining what they show.

Check your accounting basis and timing

A common source of confusion is timing. Sole traders can use different methods depending on circumstances, and turnover can be recorded by invoice date, payment date, or accounting period rules. If HMRC’s query looks like a timing mismatch, your response should explain:

- What accounting period your accounts cover

- Whether you’re using cash basis or traditional accrual accounting

- How you treat deposits, prepayments, and work-in-progress (if applicable)

- How you treat platform payouts and held balances

For example, you might have completed work in late March but been paid in April. Depending on your accounting basis, that could affect which year the income appears in. HMRC’s data may be looking at bank receipts, while your accounts reflect invoices raised in the period. Clear explanations prevent misunderstandings.

Confirm VAT treatment if you are VAT registered

If VAT is involved, be careful with terminology. Turnover in your Self Assessment accounts is usually presented net of VAT (because VAT collected is not your income; it’s tax you collect on behalf of HMRC). But bank deposits and some platform reports can be VAT-inclusive, and VAT returns cover different periods than your accounts. If HMRC is comparing figures across regimes, show them how the numbers reconcile:

- VAT-inclusive sales per platform reports

- Less output VAT

- Equals net sales (turnover) per accounts

Also note any changes in VAT registration date, scheme (cash accounting, flat rate, annual accounting), or VAT rate changes that might affect period comparisons.

Handle platform income properly

If you sell through online platforms or do gig/freelance work via intermediaries, turnover reporting can be messy because platforms often present figures in a way that is not aligned with traditional bookkeeping. Common pitfalls include:

- Recording payouts as turnover instead of gross sales

- Forgetting to include tips or bonuses paid through the platform

- Double-counting sales by including both gross sales and payouts

- Misclassifying platform fees (fees are usually an expense, not a reduction of sales, depending on how your bookkeeping is set up)

When responding to HMRC, use a simple table approach in narrative form: “Platform sales summary shows gross sales of X. Platform withheld fees of Y and paid out Z. The accounts include turnover of X and expenses of Y.” Then attach the platform summary that matches those numbers.

Cash sales: show your method, not just your confidence

If you take cash, HMRC will want to know how you ensure all takings are recorded. Simply stating “I record all cash sales” is weaker than showing the system you used. Examples of supporting evidence include:

- Daily takings sheets signed or dated

- Photographs/scans of till rolls or Z-reports

- Appointment diary or booking system matching daily takings

- Stock movement records (if applicable)

- Cash paid into bank, reconciled to recorded takings

If your cash records are incomplete, be honest and focus on what you can evidence. You may need to reconstruct takings from other records. This is an area where professional advice can be particularly helpful.

Review your return for mistakes before you reply

Before responding, review the filed return and your accounts. Look for:

- Transposition errors (for example, typing 15,000 instead of 51,000)

- Incorrect period selection (wrong start/end dates)

- Duplicate entries or missing months

- Sales included in expenses or vice versa

- Incorrect treatment of refunds or chargebacks

- Mixing personal and business bank accounts causing confusion

If you find an error, you should correct it properly rather than trying to “explain it away”. A clear correction supported by workings often leads to a faster resolution than a defensive response.

If you need to amend: do it carefully and transparently

If you discover your turnover figure is wrong, you may need to amend your tax return. The correct approach depends on the timing and the type of check HMRC is performing. In general, your goal should be to:

- Identify precisely what is wrong

- Calculate the corrected turnover figure

- Understand how that change affects profit, tax, National Insurance, VAT (if relevant), and any other connected items

- Prepare a clear explanation of how the error happened

When dealing with HMRC, transparency matters. Corrections presented with full workings and an honest explanation are typically viewed more favourably than corrections made reluctantly after HMRC has pushed you for months.

Write a clear, structured response

Your response should be easy to follow. Imagine the HMRC officer is handling multiple cases. Help them help you. A strong response usually includes:

- A short opening that references the HMRC letter and the tax year

- A direct statement addressing the question: how turnover was calculated

- A summary of your turnover reconciliation

- Explanations for any differences between your turnover and HMRC’s apparent data (timing, VAT, fees, non-trading deposits)

- A list of attached documents

Keep the tone calm and factual. Avoid emotional language and avoid accusing HMRC of wrongdoing. You can disagree with their assumptions without being combative. If you are unsure about what HMRC’s comparison is based on, you can say you are responding based on your understanding and invite them to clarify what specific data point they believe is inconsistent.

Be consistent and avoid accidental contradictions

When people are stressed, they sometimes give explanations that don’t align with the documents. For example, saying “all income is paid into my bank” while also saying you take cash. Or saying “platform reports are net of fees” when they are gross. These contradictions can prolong the enquiry.

Before sending your response, cross-check that:

- Your numbers add up

- Your explanation matches the evidence

- Dates and periods are consistent

- You have not accidentally included personal items as business turnover (or vice versa)

If you have multiple bank accounts, be explicit about which account(s) were used for business receipts. If you have a personal account that sometimes receives business income, acknowledge it and explain how you separated transactions.

Know what not to do

There are a few common mistakes that make HMRC queries worse:

- Sending edited or incomplete bank statements (never alter statements)

- Making up figures because you can’t find records

- Dumping unorganised paperwork without explanation

- Ignoring requests and hoping HMRC forgets

- Over-explaining irrelevant details while failing to address the core question

If you don’t have a requested document, say so and offer an alternative. For example, if a platform only provides annual summaries and you can’t obtain monthly reports, provide the annual summary plus a bank payout schedule and explain the limitation.

Keep a communication log and stay organised

From the moment HMRC writes to you, create a simple log. Record:

- Date received

- Deadline

- What was requested

- What you sent and when

- Reference numbers

- Any phone call notes (date, time, name if given, summary of discussion)

Organisation is not just about being tidy; it protects you if there’s later disagreement about what was provided or when. It also reduces the risk of sending conflicting information in multiple rounds.

Prepare for follow-up questions

Even if your first response is strong, HMRC may ask follow-up questions. This is normal. Typical follow-ups include:

- Requests for a full set of bank statements for the period

- Specific explanations of large deposits

- Clarification of how you separate personal and business transactions

- Evidence of cash takings procedures

- Explanation of any discrepancies between VAT returns and accounts

Try to respond in the same structured way each time: question, answer, evidence. If HMRC’s questions start to widen beyond turnover into general lifestyle or capital, consider getting professional help if you haven’t already.

If HMRC suggests your turnover is too low: how to respond

Sometimes HMRC doesn’t have a specific “missing deposit” but believes your turnover is not credible for your trade. This can happen if they compare your results to industry averages, or if your declared profits seem low relative to your working hours, pricing, or visible activity (such as advertising and online reviews).

In that situation, the best response is to demonstrate the reality of your business. Turnover can be lower for many legitimate reasons:

- You worked part-time or reduced hours

- You had illness or caring responsibilities

- You lost a major client

- You discounted heavily or ran promotions

- You focused on training, setup, or investment rather than sales

- Your sector had local conditions that reduced demand

Support your explanation with evidence where possible: diary extracts, job sheets, appointment logs, platform activity summaries, cancellation records, or correspondence showing lost contracts. The goal is to make your turnover figure plausible in context, not just arithmetically correct.

If HMRC suggests you have undeclared income

If HMRC believes you have undeclared turnover, the tone may become more serious. Do not respond with blanket denials if you haven’t done the work to reconcile the numbers. Instead:

- Ask yourself what HMRC might be seeing (bank credits, platform data, third-party reports)

- Reconcile all inflows to categories: sales, transfers, loans, gifts, refunds, other

- Identify items that could look like sales but are not (for example, a family member repaying money, moving funds between accounts, selling personal items)

Then respond with a categorised explanation backed by evidence. For example, if there is a large deposit that is a loan, provide the loan agreement or clear supporting correspondence. If it’s a transfer from another account, provide statements from both accounts showing the matching entries.

If you discover there truly is undeclared income, you should take professional advice immediately. Handling voluntary disclosure and correcting returns is sensitive and should be done carefully. The best outcomes tend to come from being proactive, accurate, and transparent.

How HMRC may test your turnover

Understanding HMRC’s methods can help you prepare. They may:

- Compare sales to bank deposits and known platform payouts

- Review your invoicing sequence for gaps

- Review expense patterns and ask whether sales levels are realistic

- Examine VAT returns if applicable

- Ask about your pricing, volume of work, and hours

- In some cases, use indirect methods (for example, stock purchases compared to sales, or capacity calculations for service businesses)

You don’t need to be afraid of these tests if your records are sound. The aim is to show that your turnover figure is based on a robust system and that you can demonstrate it with evidence.

Protect yourself: be careful with phone calls

HMRC may phone you, or you may consider calling them. Phone calls can be helpful for clarifying what is needed, but they can also lead to misunderstandings. If you speak to HMRC:

- Take notes during the call

- Confirm what documents they want and the relevant period

- Avoid speculating or guessing numbers

- If you don’t know an answer, say you will check and respond in writing

It is usually safer to provide detailed explanations in writing, where you can be precise and attach supporting documents.

What penalties and outcomes are possible

Many turnover queries end with no change, especially where the issue was a misunderstanding or timing difference. Other outcomes can include:

- HMRC accepting your explanation and closing the check

- Agreement of an amended turnover figure and recalculated tax

- Interest charged on underpaid tax (if any)

- Penalties if HMRC believes the error was careless, deliberate, or concealed

The risk of penalties increases when records are poor, when explanations change, or when HMRC believes you withheld information. That is why careful reconciliation and a clear response matter.

Improve your recordkeeping to reduce future risk

Even if the query resolves quickly, treat it as a signal to strengthen your systems. Strong records reduce the chance of future queries and make responses easier if they occur. Practical improvements include:

- Use a separate business bank account

- Issue invoices consistently and keep an invoice register

- Keep digital copies of invoices, receipts, and key correspondence

- Download platform statements monthly and store them

- Reconcile bank transactions monthly

- Maintain a simple cashbook if you handle cash

- Keep notes explaining unusual transactions

If you use bookkeeping software, ensure categories are consistent and that platform fees, refunds, and transfers are recorded correctly. If you do your books in spreadsheets, keep them tidy, backed up, and linked to evidence files where possible.

How to present a turnover reconciliation that HMRC can follow

While you may not be asked for a formal reconciliation, providing one can resolve confusion quickly. A good reconciliation will:

- Start with gross sales per invoices/platform summaries

- Show adjustments for refunds and credit notes

- Explain fees and net payouts for platforms

- Separate VAT elements if relevant

- Bridge the figure to bank deposits, highlighting timing differences

Use plain language. For instance: “Turnover of £X is based on invoices 1001–1125 issued between 6 April and 5 April. The sales ledger total agrees to the profit and loss report. Platform A shows gross sales of £Y and fees of £Z; turnover includes gross sales and fees are included in expenses. Bank deposits are lower than gross sales because deposits are net of fees and include a one-week payout delay.”

This kind of narrative, paired with the right attachments, gives HMRC what they need without overwhelming them.

If you are selected for a wider compliance check

Sometimes a turnover query is part of a broader compliance check. HMRC may ask about expenses, capital items, private use adjustments, or other aspects of your return. If that happens, respond to each area systematically. Do not assume they are accusing you; they are gathering information.

However, if the scope expands significantly, or if you feel out of depth, appointing professional support is often worth it. Wider checks can become time-consuming and stressful, and a specialist can help you manage the process and communicate effectively.

Be honest about uncertainty, but don’t be vague

It’s okay to say “I need to confirm that figure” or “I do not have that document available” as long as you follow it with a plan: “I will provide the statement by X date” or “I have attached alternative evidence in the form of…” HMRC generally prefers accuracy over speed. What they do not like is evasiveness.

If parts of your records are weaker, focus on what you can support and improve your processes going forward. Avoid sweeping claims that your system is perfect if it isn’t. It is better to say, “Cash takings were recorded daily; I have attached the daily takings sheets for the period. Where sheets are missing for two days in August, I have reconstructed takings from booking records and card receipts, and I have explained the method.”

Plan your next steps after you respond

After you send your response, keep your file updated. If HMRC replies, respond promptly. If they accept your explanation, store the closure letter and keep the working papers you used, because similar questions can arise in later years. If HMRC disagrees, you may need to provide additional detail, negotiate a revised figure, or seek advice on formal steps.

Most importantly, take control of your bookkeeping process so you are not rebuilding everything under pressure again. For many sole traders, the biggest lesson is that turnover is easier to defend when it is backed by a consistent system: regular reconciliations, clear separation of personal and business, and stored evidence for all key income sources.

Key takeaways for sole traders

When HMRC questions your turnover figures, your aim is to respond calmly, accurately, and with a clear evidence trail. Understand the question, meet deadlines, rebuild your turnover calculation from source records, reconcile it to bank deposits and platform reports, and explain any differences in plain language. If you find an error, correct it transparently and consider professional support. With a structured approach, many turnover queries can be resolved without drama, and you can come out of the process with better systems that reduce the chance of repeat scrutiny.