For many business owners, just hearing the words “HMRC investigation” can be enough to cause anxiety. The reality, however, is that investigations aren’t random, and they are rarely about businesses deliberately doing something wrong. Instead, HMRC is usually responding to specific red flags. With the right knowledge and preparation, most businesses can avoid ever finding themselves in the spotlight.
At Chadwicks, we’ve supported hundreds of businesses and individuals over the years, and patterns quickly become clear. In almost two decades of practice, we’ve never seen a full-blown corporation tax investigation. They are incredibly rare. Instead, HMRC tends to concentrate on areas where errors and misunderstandings are more common, or where avoidance is easier to detect.
One of the biggest triggers is VAT. Investigations often begin when a business reclaims VAT on its return, particularly if it is among the first returns filed. Another red flag is when there is a sudden shift in the amount of VAT owed. For example, during the pandemic we worked with a construction client who switched from renovating houses, which is subject to 20% VAT, to building new ones, which are zero-rated. This change was entirely legitimate, but the dramatic difference in VAT owed attracted HMRC’s attention nonetheless. Large one-off reclaims, such as the purchase of expensive machinery, can also prompt questions. In all of these cases, watertight, digital records are essential. HMRC is fully committed to Making Tax Digital, and businesses without clear, up-to-date documentation are at much greater risk of prolonged investigations.
Another common area of focus is IR35, legislation designed to prevent “disguised employment.” This applies when someone is working like an employee but being paid through their own limited company as though they were self-employed. The consequences of being caught on the wrong side of IR35 are severe. Businesses can be forced to pay not only the employer’s National Insurance contributions but also the tax and NI that would have been due from the worker. In cases where HMRC believes this was deliberate, the penalties can be doubled. For any business working with contractors, specialist advice is vital. Having strong contracts in place, showing evidence of multiple clients, and retaining proof that workers have the right to substitute themselves are all essential parts of staying compliant.
Personal tax is another area where HMRC is particularly active, and investigations here are often triggered by something less technical than data analysis: tip-offs. Disgruntled business partners, unhappy customers, and even ex-spouses frequently provide HMRC with information that sparks further inquiries. In many cases, the claims don’t stand up, but even when a business or individual is cleared, the process can take months, draining both time and resources. The best protection is simple: keep accurate records, declare all income, and avoid leaving any grey areas that could be questioned later.
One area that catches many people off guard is the link between benefits claims and income declarations. HMRC and the Department for Work and Pensions share data, and mismatches between what is reported for tax and what has been claimed in benefits are easy to spot. These discrepancies don’t always stem from deliberate fraud. Often they come from misunderstandings, such as forgetting to declare dividend income or assuming that rental income is covered by personal allowances. Unfortunately, HMRC does not view these oversights lightly.
The modern world has also given HMRC a new tool: the digital footprint. Investigators no longer need to sit in vans with binoculars outside businesses. Instead, they can simply scan social media accounts to look for signs of undeclared income. Whether it’s selling products on Instagram, offering services via Facebook, or even running an OnlyFans account, all of it counts as taxable income. Failing to declare it is a quick way to invite scrutiny.
Real-world examples highlight just how disruptive these investigations can be, even when nothing improper has been done. One client who reclaimed £40,000 in VAT after purchasing new machinery was entirely within the rules. Nevertheless, the size of the reclaim compared to their usual returns was enough to trigger an investigation, delaying their refund for months. In another case, an anonymous tip-off from a former partner led to an IR35 review that dragged on unnecessarily, despite there being no evidence of wrongdoing. These stories show that even when a business is compliant, the process of being investigated can be stressful and costly.
The best defence is prevention. Keeping digital, up-to-date records gives HMRC little room to question your returns. Seeking professional advice on areas like IR35 before engaging contractors reduces the risk of falling foul of complex legislation. Declaring all sources of income, even small side hustles, demonstrates transparency and keeps you safe. And, perhaps less obvious but equally important, it helps to keep your business finances private, away from personal disputes that might lead to damaging tip-offs.
HMRC investigations can be intimidating, but they are not inevitable. They tend to follow clear patterns, often sparked by sudden changes in returns, mismatched data, or undeclared income. With preparation, transparency, and the right professional support, businesses can avoid investigations altogether — and if one does come, they’ll be ready to respond confidently. At Chadwicks, we help clients put those protections in place, giving them peace of mind and the freedom to focus on growing their business.
To learn more, listen to our recent episode of the FFS Podcast: Tax Investigations: What's Really Triggering HMRC? - For Finances Sake (FFS) | Podcast on Spotify
Worried about HMRC investigations or want peace of mind that your finances are watertight?
Get in touch with our team today. We’ll help you stay compliant, protect your business, and avoid unnecessary stress.
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