HMRC investigation — questions answered
What this page covers
Direct answers to the most common questions contractors ask about HMRC investigations — what triggers an enquiry, what HMRC can ask for, time limits, penalties, the IR35 worst-case scenario, and exactly how to protect yourself.
What happens if HMRC investigates my limited company?
Direct Answer
HMRC issues a formal notice and can request records going back up to 6 years (20 years if fraud suspected). Most enquiries resolve in 3–18 months. The vast majority of contractor enquiries close with little or no additional tax due — provided you have clean records and a qualified accountant representing you.
What are the three types of HMRC enquiry?
Aspect enquiry
HMRC questions one specific aspect — a single expense, dividend timing, or deduction. Usually resolved quickly with documentation. 3–6 months.
Every income source, expense, and deduction examined. Triggered by significant inconsistencies or random selection. 6–24 months.
IR35 investigation
Specific challenge to your IR35 status. Multiple years simultaneously. Potential for very large backdated liabilities. 12–36 months.
What triggers an HMRC investigation?
HMRC uses CONNECT — a data-matching system cross-referencing banks, Companies House, Land Registry, DVLA, and overseas tax authorities — to risk-score every tax return.
Large or unusual expense claims relative to turnover
Consistent losses year after year
Variance from industry benchmarks for your sector
Long-term single-client relationship (IR35 risk indicator)
Moving from permanent employment to contracting with the same employer
A tip-off from a client, recruiter, or former employer
Random selection — HMRC selects a proportion of returns every year regardless
What records can HMRC ask for?
Business bank statements — all accounts
Sales invoices and purchase receipts
Payroll records and RTI submissions
VAT records and returns
Dividend minutes and vouchers
Client contracts and Status Determination Statements
Mileage logs and travel records
Accounting software data
You cannot refuse a formal information notice. Failure to respond carries penalties. Having organised digital records speeds up the process significantly.
How far back can HMRC investigate?
| Situation | HMRC time limit |
|---|---|
| Standard — reasonable care taken | 12 months from filing deadline |
| Careless error | 4 years from end of relevant tax year |
| Deliberate error | 6 years from end of relevant tax year |
| Fraud | 20 years |
What are the penalties if HMRC finds an underpayment?
| Behaviour | Penalty range |
|---|---|
| Reasonable care taken — honest error | No penalty (tax + interest only) |
| Careless error | 0–30% of unpaid tax |
| Deliberate error (not concealed) | 20–70% of unpaid tax |
| Deliberate and concealed | 30–100% of unpaid tax |
Interest accrues at approximately 7.75% per annum on unpaid tax. Penalties are reduced for voluntary disclosure and cooperation with HMRC.
What is the IR35 worst-case scenario?
Example: 3 years of IR35 non-compliance at £80,000/year
Additional Income Tax and NI (3 years): ~£50,000–£65,000
Interest on late payment: ~£5,000–£10,000
Penalties (careless): £0–£20,000
Professional accountancy fees: £5,000–£15,000
Total exposure: £60,000–£110,000+
This is why maintaining a strong IR35 position with proper contracts, an SDS, and specialist accountancy is not optional — it is the single most important financial protection a contractor has.
What is the enquiry process step by step?
Opening letter — formal notice from HMRC stating the enquiry is open and what they want to examine. You cannot refuse.
Information request — HMRC asks for specific records. Typically 30 days to respond. Your accountant prepares and submits everything.
Review and correspondence — HMRC reviews records and asks follow-up questions. This phase can take months. Your accountant manages all communication.
Resolution — written closure notice confirming no additional tax, or stating the agreed amount. Most cases settle here.
Tribunal (if disputed) — you can appeal to the First-tier Tax Tribunal. Most enquiries settle before this stage.
How do I protect myself?
Keep complete digital records in accounting software — bank statements, receipts, invoices, mileage logs
File all returns accurately and on time
Maintain a strong IR35 position — proper contracts, SDS, evidence of working practices
Keep dividend minutes and vouchers for every dividend payment
Use a specialist contractor accountant who reviews your position proactively
Have fee protection insurance — covers professional costs if HMRC opens an enquiry. Autobooks includes this as standard for all clients.
What is fee protection insurance?
Fee protection insurance covers your accountant's professional fees during an HMRC enquiry. Accountants charge £150–£300/hour for enquiry work — a full investigation can cost thousands in professional fees alone, even if no additional tax is found. Fee protection insurance means you don't pay those costs. Autobooks includes fee protection insurance as standard for all clients — so if HMRC comes knocking, your defence costs are covered.
Is your IR35 position solid?
An IR35 investigation is the worst-case scenario for any contractor. Use our free 15-point checklist to assess your contract before HMRC does.
- ✓ Covers substitution, control & MOO
- ✓ Plain English — no legal jargon
- ✓ Includes a scoring guide with what to do next
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Related guides
Fee protection insurance covers your defence costs if HMRC investigates.
Autobooks includes fee protection insurance as standard for all clients — from £89+VAT/month.