HMRC is increasing its compliance activity, using more data, more targeted interventions and a wider range of investigation tools. For accountants, that means clients are more likely to receive enquiries, nudge letters and compliance checks than they were just a few years ago.
In a recent webinar, Tax Investigations Update, Sarah Scala explains that if your clients haven't yet received a letter from HMRC, there's a good chance they will at some point. Understanding how HMRC is selecting taxpayers, what different interventions mean and when specialist support becomes appropriate can help you respond confidently and protect your clients' interests.
HMRC's Compliance Activity Is Becoming More Data-Led
According to Sarah, HMRC's compliance activity has accelerated significantly since the pandemic. Rather than relying solely on reviewing submitted tax returns, HMRC increasingly uses large volumes of third-party data to identify potential issues before making contact.
Examples include:
- Information obtained from banks.
- Property letting data.
- Online marketplace and platform sales.
- Overseas financial information received through international reporting agreements.
- Internal data matching across HMRC systems.
The result is more targeted enquiries rather than random checks.
For accountants, this means clients may receive communications even where no tax return has been selected for enquiry in the traditional sense.
Which Clients Are Most Likely to Receive Attention?
While any taxpayer can be contacted, certain client groups appear more likely to attract HMRC scrutiny.
These include:
- Landlords.
- Small businesses.
- Online sellers.
- Cash-based businesses.
- Businesses with unusual turnover patterns or unexplained fluctuations.
- Taxpayers with persistent filing or payment issues.
Many enquiries begin because HMRC identifies a mismatch between information already held and what has been reported.
Reviewing client portfolios periodically for obvious risk indicators can help identify potential issues before HMRC does.
Not Every HMRC Letter Means the Same Thing
One of the biggest challenges for advisers is recognising what type of intervention has been received.
Sarah highlighted several common approaches, including:
Nudge Letters
These are often issued to large groups of taxpayers after HMRC receives third-party information.
Rather than opening a formal enquiry immediately, HMRC encourages taxpayers to review their position and correct any errors voluntarily where appropriate.
Tax Return Enquiries
HMRC may enquire into specific aspects of a submitted return or review multiple taxes affecting a business.
Discovery Assessments
These arise where HMRC believes new information has come to light after the normal enquiry window has closed.
Code of Practice 8
Typically used for complex technical tax disputes.
Code of Practice 9
Reserved for suspected tax fraud and significantly more serious than routine compliance activity.
Recognising which process applies is important because each has different procedures, timescales and strategic considerations.
Communication Can Influence the Outcome
One recurring theme throughout the webinar was the importance of preparation before responding.
Rather than replying immediately, advisers should:
- Read HMRC's correspondence carefully.
- Identify deadlines and statutory powers.
- Meet with the client to establish the full facts.
- Gather supporting evidence.
- Build a clear chronology before responding.
Sarah also encouraged advisers to develop constructive working relationships with HMRC investigators where possible.
Simple actions such as agreeing realistic timescales, arranging progress meetings and maintaining open communication can reduce delays and help keep investigations moving.
Common Mistakes That Make Investigations Harder
Several avoidable mistakes frequently complicate tax disputes.
These include:
- Assuming the client has already disclosed everything relevant.
- Responding before establishing all the facts.
- Missing deadlines.
- Allowing HMRC to dictate the entire narrative.
- Confusing a "reasonable excuse" with having taken "reasonable care".
- Treating every investigation as though it follows the same pattern.
Every case has its own facts, evidence and strategy.
Using previous investigations as a template can easily overlook important differences.
When Specialist Support Becomes Appropriate
Many accountants successfully manage routine HMRC enquiries.
However, Sarah highlighted several situations where specialist tax dispute advice should be considered early.
These include:
- Allegations of tax fraud.
- Communications from HMRC's Fraud Investigation Service.
- Code of Practice 9 cases.
- Criminal investigations.
- Cases involving significant strategic decisions or tribunal proceedings.
Early specialist involvement is often less about calculations and more about protecting the client's position throughout the investigation process.
Practical Steps for Accountants
As HMRC continues expanding its data capabilities and compliance activity, firms can reduce risk by adopting a proactive approach.
That includes:
- Encouraging accurate and timely reporting.
- Reviewing unusual transactions before filing returns.
- Maintaining clear documentation.
- Preparing clients for possible HMRC contact.
- Knowing when to involve specialist advisers.
Many investigations can be managed effectively with good preparation, careful communication and an understanding of HMRC's processes.
Key Takeaway
HMRC's investigations are becoming increasingly targeted, supported by extensive data and more sophisticated compliance techniques.
For accountants, technical knowledge remains important, but preparation, communication and strategy are equally valuable. Understanding how HMRC approaches investigations—and recognising when additional expertise is needed—can make a significant difference to the outcome for your clients.
Frequently Asked Questions About HMRC Tax Investigations
What triggers an HMRC tax investigation?
HMRC investigations are increasingly driven by data rather than random selection. Information received from banks, property transactions, online selling platforms and other third parties may be compared with tax returns to identify discrepancies. Late filing, unusual changes in turnover, missing tax returns and sector-specific anomalies may also lead to further enquiries.
What is a HMRC nudge letter?
A nudge letter is an informal communication encouraging a taxpayer to review a specific area of their tax affairs. These letters are often issued after HMRC identifies information that may not match its records. Receiving a nudge letter does not automatically mean tax is owed, but it should be reviewed carefully and responded to appropriately where necessary.
Does receiving a HMRC enquiry mean my client has done something wrong?
Not necessarily.
Many HMRC enquiries are prompted by data mismatches rather than confirmed errors. An enquiry simply gives HMRC an opportunity to ask questions or request supporting evidence. A well-prepared response supported by accurate records may resolve the matter without any additional tax becoming due.
Which clients are most likely to receive HMRC attention?
While any taxpayer may receive an enquiry, accountants should pay particular attention to clients who:
- Own rental properties.
- Operate cash-based businesses.
- Sell goods online.
- Have significant fluctuations in turnover.
- File tax returns late or inconsistently.
- Have unusual transactions that may require additional explanation.
Regular reviews of these clients' records can help identify issues before HMRC raises them.
What is the difference between a HMRC nudge letter and a formal investigation?
A nudge letter encourages a taxpayer to review and, where appropriate, correct their tax position voluntarily.
A formal investigation gives HMRC statutory powers to request information and examine specific areas of a taxpayer's affairs. Different investigation types follow different legal procedures, so understanding which process has been opened is important before responding.
What should accountants do when a client receives a HMRC letter?
Before responding, accountants should:
- Read the correspondence carefully.
- Identify the statutory deadlines.
- Meet with the client to establish the full facts.
- Gather supporting evidence.
- Consider whether specialist tax dispute advice may be appropriate.
Responding too quickly without understanding the full position can create unnecessary complications later.
When should a specialist tax disputes adviser become involved?
Routine enquiries can often be managed by an accountant.
However, specialist support should be considered where the matter involves suspected tax fraud, Code of Practice 9, communications from HMRC's Fraud Investigation Service, criminal investigations or complex technical disputes. Early advice can help shape the overall strategy before important decisions are made.
Can HMRC use information from third parties?
Yes.
HMRC can obtain information from a range of lawful sources, including financial institutions, online platforms and overseas tax authorities through international information-sharing arrangements. This information may be compared with tax returns to identify potential discrepancies that warrant further review.
How can accountants help clients reduce the risk of HMRC enquiries?
Good compliance remains the best defence.
Firms can help clients by encouraging accurate record-keeping, timely filing, reviewing unusual transactions before submission and documenting explanations for significant changes in trading results where appropriate. Identifying potential issues early is often far less disruptive than responding to an investigation later.
Key Takeaways
- HMRC compliance activity is becoming increasingly data-led.
- Nudge letters are becoming more common across a range of taxpayer groups.
- Not every HMRC enquiry indicates wrongdoing.
- Preparation and accurate evidence are critical when responding.
- Recognising when specialist support is appropriate can improve outcomes for clients.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.
