What should sole traders do if they receive an HMRC compliance check letter?

What an HMRC compliance check letter really means

Receiving a compliance check letter from HM Revenue & Customs (HMRC) can feel unsettling, especially if you are a sole trader who handles everything yourself. The wording may sound formal, the timelines may feel tight, and it is easy to jump to the conclusion that you are “in trouble.” In most cases, though, a compliance check is simply HMRC’s way of reviewing whether your tax position is correct. It does not automatically mean HMRC thinks you have done something wrong, and it does not mean penalties are inevitable. It does mean you should treat the letter seriously, respond on time, and approach the process in an organised, methodical way.

A compliance check can cover many areas: Income Tax (including Self Assessment), National Insurance, VAT (if you are registered), Construction Industry Scheme (CIS) issues for relevant trades, and sometimes PAYE matters if you have employees. For most sole traders, the focus is commonly on business income and expenses, the completeness of records, and whether the figures on the tax return are supported by evidence.

The best mindset is to treat the compliance check like a structured information request. HMRC wants to understand how you arrived at the numbers on your return and whether your record-keeping is adequate. Your job is to provide clear answers, send relevant documents, and keep a tidy trail of what you provided and when. If something needs correction, it is usually better to deal with it proactively than to be defensive or avoidant.

First steps: stay calm, read the letter twice, and note the deadline

Before you do anything else, sit down and read the letter carefully. Then read it again. Compliance letters vary widely: some are very specific and ask for a particular set of documents; others are broader and request an explanation of how your business operates and how you keep records.

Make a note of the response deadline. Missing it can create unnecessary complications, including escalations, additional follow-ups, or assumptions being made in the absence of information. If the deadline is genuinely unrealistic due to illness, travel, or difficulty retrieving records, you can ask for more time. Do not ignore the letter while you “figure it out.” If you need extra time, request it quickly and in writing.

Also note the reference number on the letter, the tax year(s) involved, the specific taxes mentioned, and the name and contact details of the HMRC officer or team handling the check. These details matter because different departments handle different types of checks, and you want any correspondence to land in the right place.

Check that the letter is genuine (without panicking)

Most compliance check letters are genuine, but scams do exist. A simple authenticity check is sensible. Look for key indicators: an HMRC letterhead, a reference number, a clear description of the issue, and legitimate contact routes. Be cautious if the letter demands immediate payment, threatens arrest, or asks for bank details or passwords. Compliance checks are about reviewing information, not about demanding you hand over sensitive credentials.

If in doubt, do not use phone numbers or links provided in a suspicious letter. Instead, use official HMRC contact details from the government website and quote the reference number. This way you can confirm whether an enquiry exists. This step can reduce anxiety and ensure you do not accidentally engage with fraud.

Understand what type of compliance check you are facing

Compliance checks can range from narrow to broad. Understanding which you have will help you respond efficiently and avoid over-sharing irrelevant documents. Common types include:

1) A check into a specific point – for example, a particular expense category that seems unusually high, a mismatch in turnover figures, or a claim (such as use of home as office) that HMRC wants clarified.

2) A check into business records – HMRC may ask to see your bookkeeping, invoices, bank statements, and an explanation of your record-keeping system.

3) A full check into the return – more extensive, sometimes covering multiple categories of income and expenses, and occasionally multiple years.

4) A “random” check – HMRC sometimes conducts checks without a specific trigger, as part of compliance activity. Even if it is random, you must still treat it as important.

If the letter is unclear, you can ask HMRC to confirm what they are checking and what they need. This is not “talking yourself into trouble.” It is a practical way to narrow the scope and avoid sending unnecessary paperwork.

Decide early whether you need professional help

Many sole traders successfully handle simple compliance checks themselves, especially if their records are orderly and the questions are limited. However, professional support can be very valuable in certain situations:

If the letter suggests a wider enquiry into your return, or if HMRC is questioning the legitimacy of a significant set of expenses, it may be wise to involve an accountant or tax adviser. It can also be sensible if you know your bookkeeping is incomplete, if you have mixed business and personal transactions, or if you feel overwhelmed by the process.

Professional help can provide three key benefits. First, it can help you understand what HMRC is really asking and why. Second, it can help you present information in a clear, structured format that answers questions efficiently. Third, it can reduce the risk of accidental admissions or inconsistent explanations that complicate matters. If you do appoint an agent, they can communicate with HMRC on your behalf, but you will still need to provide records and explanations.

If cost is a concern, consider a targeted approach: an accountant might review your draft response, help you organise documents, or advise on specific technical points, rather than taking over the entire process.

Create a simple “compliance check folder” and keep everything in one place

Organisation reduces stress and helps you respond accurately. Create a dedicated folder (digital, physical, or both) for the compliance check. Save or file:

• The original HMRC letter and envelope (if relevant)
• Notes of any phone calls (date, time, name of person spoken to, and what was agreed)
• Copies of all letters and emails you send
• Copies of all documents you provide
• A checklist of HMRC’s requests and what you have supplied

If you send anything by post, consider recorded delivery and keep proof of posting. If you submit documents electronically, save confirmation emails or screenshots showing what was uploaded and when. The goal is to be able to demonstrate that you complied and to avoid situations where HMRC says they did not receive something you sent.

Common triggers: why HMRC might be asking questions

HMRC does not always explain why a check was started, but common triggers for sole traders include unusual fluctuations, mismatches with third-party information, or expense claims that appear high relative to turnover. Examples include:

• Turnover that changes sharply year-on-year without a clear explanation
• Expenses that spike, especially travel, motor, subsistence, repairs, or “other costs”
• Significant cash takings in sectors where cash is common
• Losses reported repeatedly over multiple years
• Home office or rent claims that seem high
• High levels of subcontractor costs or CIS-related payments for certain trades
• Claims that intersect with personal use (vehicles, phones, internet, tools used privately)

None of these automatically mean wrongdoing. Often it is simply that the numbers look unusual compared to typical patterns, or that HMRC wants reassurance that your approach is reasonable and supported by evidence.

Respond on time, but do not rush into a messy reply

It is better to respond with a well-organised, accurate package of information than to send a hasty, incomplete response that triggers more questions. Aim to acknowledge the letter promptly (especially if you need time to gather documents) and then follow through with the full response by the deadline.

Your response should be polite, factual, and structured. Treat it like a business communication, not an argument. If the letter lists items A to F, mirror that structure in your reply so it is easy for the HMRC officer to follow. If you do not have something, explain why and what alternative evidence you can provide.

Gather your core documents: what HMRC typically asks for

HMRC’s request will vary, but sole traders are commonly asked for some combination of the following:

Bank statements – sometimes all accounts used for the business, including personal accounts if business takings go through them. If you used multiple accounts, ensure you provide the right ones for the period in question.

Sales records – invoices, till reports, booking system exports, payment processor statements, or spreadsheets showing takings. If you work through platforms (for example, online marketplaces), you may need statements showing fees and payouts.

Purchase invoices and receipts – evidence for expenses claimed, ideally sorted by category and date.

Bookkeeping reports – profit and loss statements, general ledger extracts, or summaries from your accounting software.

Cash records – cashbook, daily takings sheets, or explanations of how cash was recorded and banked.

Vehicle records – mileage logs, insurance, fuel, repairs, and how you calculated business use.

Home working calculations – how you calculated use of home as office, including the method used and supporting documents (such as utility bills if you used actual costs).

Contracts and agreements – for example, subcontractor agreements, rent agreements for premises, or finance agreements for equipment.

Where possible, provide summaries plus supporting documents. A tidy schedule that totals each category and matches your tax return can be extremely helpful.

Explain your business in plain English

HMRC may ask you to describe what your business does, how you get paid, and how you keep records. This is an opportunity to reduce confusion. Provide a clear narrative: what services or products you provide, who your customers are, whether you take cash, how you invoice, and what your normal process is for recording income and expenses.

For example, if you are a tradesperson who sometimes receives cash, explain how you record it at the point of receipt, whether you issue invoices or receipts, and when you bank the cash. If you are paid via bank transfer, explain whether you invoice or use a booking platform, and how those records feed into your bookkeeping.

This kind of explanation can head off follow-up questions. The goal is to show that your figures are grounded in a consistent, sensible process.

Be careful with personal versus business spending

One of the most common trouble spots for sole traders is mixing personal and business transactions. Many people start out using a personal bank account, then later open a business account, or they use one account for both because it feels simpler. HMRC can accept that this happens, but it does create extra scrutiny because it becomes harder to see what is business-related.

If you have mixed transactions, do not try to hide it. Instead, be transparent and demonstrate that you have identified and separated business from personal. Provide a reconciliation or annotation where needed. For example, if your bank statement includes supermarket shopping, personal subscriptions, and business tool purchases, you might provide a marked-up statement or a spreadsheet listing each business transaction, with notes explaining what it was.

Similarly, if you claimed phone or internet costs, explain how you calculated business use. If you claimed part of rent or utilities, show your method. HMRC tends to respond better to a reasonable calculation explained clearly than to vague assertions that “it’s mostly for business.”

Understand “allowable expenses” and what HMRC may challenge

For sole traders, expenses generally need to be “wholly and exclusively” for business purposes to be fully deductible. Where there is mixed use (business and personal), you usually need to apportion costs and claim only the business portion. Compliance checks often focus on categories where personal benefit is common. Examples include:

Motor expenses – If you use your vehicle personally as well as for work, HMRC may ask how you calculated the claim. If you use the simplified mileage method, provide mileage records. If you use actual costs, explain the business-use percentage and support it with evidence such as a log.

Travel and subsistence – HMRC may look for evidence that travel was for business purposes and that subsistence claims are not routine personal living costs. Clear descriptions and receipts help.

Use of home – HMRC may ask how you calculated your claim. If you used a flat-rate method, explain which rate and why. If you used actual costs, show your apportionment method.

Entertainment – Client entertainment is generally not allowable for Income Tax purposes for sole traders. If you included it in expenses, it can be challenged. Some costs that feel like “marketing” may be interpreted differently, so clarity matters.

Clothing – Everyday clothing is typically not allowable, even if worn for work. Protective clothing or specialist uniforms can be different. If you have claimed clothing, be ready to explain why it is specifically for work.

Gifts – Certain gifts to customers can be disallowed depending on the circumstances. If you have claimed gifts, keep documentation and explain the business rationale.

If you find that you have claimed something incorrectly, do not panic. The key is to correct it appropriately, provide an explanation, and demonstrate cooperation. Penalties often depend on behaviour (careless versus deliberate) and on whether you corrected issues promptly.

Reconcile your turnover: make sure your income story adds up

Turnover is a central focus in many checks. HMRC may compare your declared turnover to bank deposits, payment processor data, or information from third parties. A common sole trader issue is incomplete capture of income when cash is received, when platforms deduct fees before paying out, or when invoices are raised but not tracked to payment.

To prepare, reconcile your turnover. This means matching sales records to bank receipts and identifying differences. Differences are not automatically errors; they might include loan proceeds, transfers between accounts, refunds, or personal deposits. But you should be able to explain them clearly.

If you use online platforms, clarify whether your turnover is recorded gross (before platform fees) or net (after fees) and ensure your accounting treatment is consistent. A simple explanation can prevent confusion where HMRC sees deposits that do not match your invoicing amounts.

Address gaps in records honestly and constructively

Not every sole trader has perfect records, especially in early years or during busy periods. If receipts were lost, if you changed software, or if a phone was damaged and photos of receipts disappeared, explain what happened. Then show what you did to reconstruct the position.

Reconstruction can include obtaining duplicate invoices from suppliers, downloading transaction histories, using bank statements to evidence purchases, and creating a summary schedule. HMRC is not expecting perfection, but it does expect you to take reasonable care. A credible explanation and a practical effort to rebuild records can go a long way.

Do not fabricate receipts or documents. Aside from being unlawful, inconsistencies can be detected and can shift a check from a routine review to a more serious matter. If you do not have evidence for a particular expense, consider whether it is safer to remove it or adjust it, rather than defend it without support.

How to write your response: structure, tone, and clarity

A strong response usually has three components: a cover letter, a set of schedules or summaries, and the supporting documents. You want to make it easy for the HMRC officer to tick off each point and see that the numbers align.

1) Cover letter
Start by confirming you received the letter, quoting the reference number and the tax year(s). Then answer each request in order. If you are enclosing documents, list them. If you are providing a spreadsheet, describe what it contains. If there are any issues (for example, missing receipts), mention them with an explanation and how you handled them.

2) Schedules and summaries
A schedule might be a spreadsheet that lists expenses by category with dates, supplier names, amounts, and notes. Another schedule might reconcile turnover to bank deposits. These summaries show you are in control of your records.

3) Supporting documents
Provide documents that substantiate the schedules: invoices, receipts, statements, and logs. Label them clearly and keep them organised. A chaotic “dump” of hundreds of files can slow everything down and increase the chance of misunderstandings.

Keep your tone polite and factual. Avoid emotional language. You can disagree with HMRC if you have grounds, but do it calmly and with evidence.

Know your rights and what HMRC can ask for

HMRC has powers to request information reasonably required to check your tax position. However, there are limits and safeguards. You generally have the right to understand what is being checked, to be treated fairly, and to ask questions if you do not understand what is being requested.

If HMRC asks for something that seems irrelevant or overly broad, you can ask why it is needed and whether a narrower set of documents would suffice. This should be done carefully and respectfully. In many cases, a quick conversation clarifies the request and avoids unnecessary work.

You can also request that communications be in writing if you find phone calls stressful. If you do speak by phone, keep notes and follow up in writing summarising what was discussed and any actions agreed.

If you discover an error: correcting it the smart way

Sometimes a compliance check reveals a genuine mistake: an expense claimed twice, income missed, or a category that was treated incorrectly. If you discover an error, it is usually best to disclose it proactively rather than waiting for HMRC to find it. A voluntary correction can demonstrate cooperation and may reduce potential penalties.

How you correct it depends on the tax year and the nature of the issue. In straightforward cases, HMRC may simply agree an adjustment as part of the check. If the return needs amending, you may be asked to submit an amended return or provide a calculation showing the corrected position.

Be clear about what changed and why. If the error arose from confusion or poor records rather than deliberate behaviour, say so. The goal is not to excuse the error but to provide context, demonstrate learning, and show that you are putting better systems in place.

Penalties and interest: what affects the outcome

Penalties are not automatic. If HMRC concludes that tax was understated, the outcome may include additional tax, interest, and possibly a penalty. The size of any penalty can depend on factors such as:

• Whether the error was careless, deliberate, or deliberate and concealed
• Whether you disclosed the issue voluntarily or only after HMRC raised it
• How cooperative you were and how quickly you responded
• The quality of your records and the reasonableness of your approach

The practical takeaway is simple: respond promptly, be transparent, and provide evidence. If you do not understand a technical point, seek advice rather than guessing. Demonstrating reasonable care and cooperation generally improves outcomes.

Practical tips for compiling documents efficiently

Compliance checks can be time-consuming, but you can make the process manageable with a few practical steps:

Sort by tax year and category
Create subfolders for each tax year and then for categories such as income, motor, travel, materials, subcontractors, and so on.

Name files consistently
Use a file naming pattern like “2024-05-12_SupplierName_Amount_Category.pdf” so documents can be found quickly.

Create an index
A simple index listing documents and how they map to your schedules can reduce follow-up questions.

Use bank statements as a backbone
If receipts are scattered, start with bank statements and match transactions to invoices and receipts. This is often faster than trying to work from receipts alone.

Explain anomalies upfront
If there are one-off large expenses or unusual payments, add a brief note. It can prevent HMRC from assuming the worst.

Dealing with cash: how to demonstrate completeness

If your business receives cash, HMRC may be particularly interested in how you record it. The key is to show a consistent method. For example, you might keep a daily takings record, issue receipts, or record each cash job in an invoice system, then bank cash periodically.

Even if your system is simple, consistency helps. If you have gaps, try to reconstruct them: diaries, appointment books, job sheets, or messages with customers can support the narrative of work done. The point is to show that your declared income is grounded in records rather than estimates.

If you have used estimates, be transparent about how you estimated and why it was reasonable. Estimates are not ideal, but in real life they can occur. What HMRC will be looking for is whether your approach was careful and plausible.

How long does a compliance check take, and what happens next?

Timelines vary. Some checks conclude quickly after you provide documents and explanations. Others take longer, particularly if HMRC asks follow-up questions or if more than one tax year is involved. You may receive a request for clarification, a proposal for adjustments, or confirmation that the check is closed with no changes.

If HMRC proposes changes you disagree with, you can explain your position and provide further evidence. If agreement cannot be reached, there are formal routes for dispute resolution. However, most routine compliance checks end with either no change or an agreed adjustment.

Throughout the process, keep everything in writing as much as possible, or confirm phone discussions in writing afterward. This helps avoid misunderstandings and creates a clear record of what was said and agreed.

What not to do: common mistakes that make things worse

Some actions tend to escalate a compliance check unnecessarily. Avoid these common pitfalls:

Ignoring the letter
Non-response can lead to escalations and reduces your ability to shape the process.

Sending disorganised piles of documents
A “document dump” without structure invites more questions and can make you look unprepared.

Guessing answers on technical points
If you are unsure, say so and seek advice. Incorrect explanations can undermine credibility.

Being defensive or argumentative
You can disagree respectfully, but emotional or hostile language rarely helps.

Creating or altering documents
Never fabricate receipts or backdate invoices. If evidence is missing, explain the gap and provide alternative support where possible.

Putting better systems in place for the future

Even if your compliance check ends smoothly, it is a useful prompt to strengthen your processes. Better systems reduce stress, improve profitability insight, and make any future checks far easier.

Use separate bank accounts
A dedicated business account makes it easier to track income and expenses and reduces the risk of accidental personal claims.

Adopt digital record-keeping
Store invoices and receipts digitally and back them up. If you photograph receipts, ensure they are saved to a cloud service rather than only on your phone.

Maintain a simple mileage log
If you claim motor costs, keep a log with date, journey purpose, start/end mileage, and total miles.

Do monthly bookkeeping
Regular bookkeeping prevents year-end panic and makes it easier to identify missing invoices or unusual transactions.

Keep notes on unusual transactions
If you buy an expensive tool or have a one-off project, add a brief note. Months later, that context can be invaluable.

When the compliance check closes: keep the closure letter safe

If HMRC confirms the check is closed, keep the closure letter with your tax records. It is a useful document if questions arise later. If the outcome includes adjustments, keep the calculations and any correspondence showing how figures were agreed.

Also reflect on what triggered the check and what you learned. If your expenses were high for a genuine reason (for example, investing in equipment), consider whether your future returns can include clearer categorisation or notes in your own records so that you can explain fluctuations quickly if asked again.

A simple action plan for sole traders who receive a compliance check letter

To pull everything together, here is a practical step-by-step plan you can follow:

Step 1: Read the letter, highlight what is being checked, and note the deadline
Create a checklist of each document or explanation requested.

Step 2: Set up a dedicated folder and start a log of actions
Save the letter, record contact details, and keep notes of any calls.

Step 3: Gather core records
Bank statements, sales records, receipts, bookkeeping summaries, and any specific items HMRC asked for.

Step 4: Reconcile and summarise
Prepare schedules that match your return figures. Reconcile turnover to bank receipts where possible.

Step 5: Draft a structured response
Answer each HMRC point in order. Be clear, concise, and factual.

Step 6: Review for consistency
Check that totals align, dates match the correct tax year, and supporting documents clearly back up claims.

Step 7: Send securely and keep proof
Use the method HMRC requests. Keep copies and proof of posting or upload confirmation.

Step 8: Deal with follow-up questions promptly
If HMRC asks for clarification, respond within the requested timeframe and update your checklist.

Step 9: If errors exist, correct them proactively
Explain what happened, provide revised figures, and show improved processes.

Step 10: Improve your systems
Use the experience to strengthen record-keeping and reduce future risk.

Final thoughts: treat the check as a business process, not a personal judgement

A compliance check letter is rarely pleasant, but it does not have to be disastrous. For many sole traders, it is a structured request that can be resolved with good organisation, clear explanations, and evidence that supports the figures on the return. The biggest drivers of a smooth outcome are simple: respond on time, provide what HMRC asked for in a tidy format, and be honest about any gaps or errors.

If you have maintained decent records and your claims are reasonable, a compliance check can end with minimal disruption. If your records are messy, it can still be manageable if you tackle it methodically and seek professional support when needed. Think of it as a prompt to strengthen your systems and to run your business with clearer financial visibility. Once you have a solid record-keeping routine, any future interactions with HMRC become far less stressful, and you can spend more energy on what matters: serving customers and growing your business.