How to Prepare Your Business for an HMRC Audit

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When a foreboding brown envelope marked “HMRC” drops through the letterbox, advising your business has been earmarked for an audit, it can be a source of anxiety for many SME owners. The prospect of being investigated by HM Revenue and Customs often provokes a sense of dread, as the process may feel shrouded in mystery, with the sense of the unknown provoking irrational fears. However, there’s no need for alarm, as an HMRC audit is something that can happen to any business. As long as you deal with it efficiently, it can be completed without drama, enabling you to emerge unscathed on the other side.

What is an HMRC audit?

An audit of your business is an investigation where HMRC wishes to see your financial records to check if you’re paying the correct amount of tax. The tax office can review your business affairs at any time, but will notify you, or your accountant, with an official correspondence first so you’re aware it’s taking place. If anything has been filed wrongly, you will be given the chance to rectify the problem. However, you may still receive a financial penalty. If you have paid too much tax, the good news is you will receive a refund.

HMRC might look at various types of records, including self-assessment tax returns; corporation tax returns; PAYE returns if you’re an employer; VAT returns if you’re VAT-registered; Construction Industry Scheme documents; IR35; insurance premium tax and landfill tax.

How common are HMRC audits?

Statistics show around 248,000 small businesses are investigated each year for potential issues as a result of information gathered by various means. There are an estimated 5.5 million SMEs in the UK, as of 2025, according to the Federation of Small Businesses. This means almost 5% of the total number of small businesses are targeted for an audit every year.

Three different types of audit are included in the figures: a full inquiry means the tax office will review the company’s complete business records because it believes there’s a “significant risk” of tax error. In the case of limited companies, this may also involve reviewing the directors’ own accounts and tax affairs.

An aspect enquiry involves HMRC looking at particular aspects of a business’s accounts. This is often as a result of a genuine mistake and may have been flagged by an inconsistency in one section of recent tax returns. A random check can happen at any time and doesn’t necessarily mean the tax office suspects there are any errors in your accounting.

What are the most common triggers of an audit?

When carrying out compliance checks, HMRC uses multiple different information sources that suggest something may be wrong. Many triggers can prompt HMRC to investigate a small business including inconsistencies in tax returns, sudden changes in income or expenses, late filings, and unusual expense claims.

The tax office uses a piece of software called Connect to scour multiple information sources to find discrepancies between businesses, taxpayers, assets, income and transactions. Sometimes, the information unearthed may be inaccurate and people will be investigated unnecessarily. In addition, tip-offs from the public may identify cases to investigate. While some are genuine, sadly, some are malicious, such as from disgruntled ex-employees, so the tax office may investigate businesses that have done nothing wrong. HMRC receives an average 160,000 reports from whistle-blowers every year, but those that are sent maliciously can lead to unnecessary and expensive investigations.

What legal requirements are in place?

Businesses in the UK are required by law to keep detailed and accurate records of all their financial transactions. When an HMRC investigation begins with a request for information, you must supply what is required in a timely manner to help the inspector understand your tax situation and protect your company. Your records must be complete and accurate, or you can be penalised financially before the tax office even looks into your taxes. A hefty fine of up to £3,000 may be imposed for each failure to keep adequate records in respect of tax returns.

You must keep all records and documents relating to tax returns for 22 months following the end of each tax year if you’re an individual taxpayer. If you’re self-employed or in a business partnership, you must keep records for five years from the 31st January after the tax year. When you’re running a company, you should keep records for six years after the end of your accounting period.

Should you contact an accountant?

If you receive an audit notice, it can be beneficial to contact an accountant, rather than trying to navigate the often complex processes yourself. DL Accounts, a leading accountant in Cornwall, can help you respond with accurate information. As a provider of professional tax services in Cornwall, we can assist with preparing for an HMRC audit, as well as all other aspects of running your business’s finances. As your agent, an accountant can usually represent you during the HMRC audit, which means we can compile your records and communicate with the tax office on your behalf. Having an accountant can be a game changer, as we can handle the investigation, deal with the tax inspectors and make sure your documents are in order.

We offer expert tax advice and bookkeeping services in Cornwall that will minimise the disruption of compliance checks and help businesses stay organised in general and ready for HMRC audits.

How to respond to an audit notice

When you receive an official HMRC audit notice in relation to your small business, first verify the notice’s authenticity. Once notified, ensure you submit all requested documents by the specified deadline. These may include tax returns; bank statements; credit card statements; purchase and sales invoices; payroll records; VAT returns records; any other relevant correspondence and digital records.

Tax inspectors may wish to visit you in person at your business premises, at home, or at your accountant’s office. You must provide the requested information by law and can face a financial penalty if you refuse a personal visit. The only occasion when you can say no to a visit is if you have a “reasonable excuse”, such as a bereavement, or if you’re seriously ill, but the inspection will still go ahead at a later date.