Six Common Mistakes That Could Trigger Investigations by HMRC – How Can You Avoid Them?
- TBA
- 1 hour ago
- 4 min read
In recent years, HM Revenue and Customs (HMRC) has increased its scrutiny of local companies, individuals, and international e-commerce businesses.
Cross-border transactions, personal asset declarations, and corporate compliance have become key areas for tax inspections. Every year, tens of thousands of people are targeted by HMRC due to avoidable errors, getting dragged into investigation processes that are time-consuming, stressful, and may even result in additional costs.
Today, we have summarised the six major red flags that are most likely to trigger an HMRC tax investigation for both business owners and individual taxpayers.
By understanding the reasons that trigger the HMRC investigation system and taking simple steps to maintain compliance, you can avoid receiving that unwelcome tax notice letter.
Six Common Mistakes That Could Trigger Investigations by HMRC
1. Living standards inconsistent with declared income
If your lifestyle is significantly inconsistent with the income you declare to HMRC. For example, are you reporting a modest income while driving luxury cars, living in high-value property, or taking frequent overseas trips? HMRC's system will automatically trigger a risk alert.
HMRC cross-references information from banks, the Land Registry, and even social media. Once the figures do not add up, an investigation is almost inevitable.
You must accurately declare all sources of income, including various investments, rental income, and income from side businesses. Utilise various tax-free allowances or tax reliefs to enjoy reductions legitimately.
2. Operating cash-based businesses
In the eyes of HMRC, industries that rely mainly on cash transactions, such as catering, beauty salons, and repair services, fall into a high-risk category.
This is because cash flow is harder to track, making it easier to suspect under-reported income. If you operate a cash-based business, keeping detailed records is absolutely essential.
You must establish a complete and clear recording system, including using till systems, recording every transaction, and depositing cash into the bank in a timely manner. If an HMRC check is triggered, these records will provide clear evidence of compliance.
3. Late filing or frequent errors
Overdue declarations or multiple amendments to tax returns will lead HMRC to believe that your management is chaotic or that there are hidden risks, making it easier for you to be placed on a priority watch list.
Prepare tax materials in advance and strictly adhere to deadlines. Make sure to also seek assistance from professionals when necessary.
4. Failure to distinguish between personal and company accounts
A common mistake made by many sole traders and small business owners is mixing personal and business accounts and funds. This not only makes income and expenses difficult to explain but may also lead HMRC to suspect improper expenditure.
From the very first day of incorporating the company, you should use a separate business bank account and draw income through salary or dividends.
5. Unreasonable or excessive expense claims
While claiming business expenses is legal, they must be ‘wholly and exclusively’ for the purpose of the business.
HMRC is very sensitive to expenditure on items where abnormal amounts can easily occur, such as travel, catering, and home office costs. For example, someone who rarely uses their mobile phone for work but claims the entire phone bill, or lists a family holiday as a ‘research trip’ is likely to draw scrutiny.
Only claim genuine business expenses, keep all receipts, and prepare explanatory materials if necessary.
6. Significant abnormal fluctuations in income or profit
A sharp decline in declared income or profit margins can also trigger an investigation, especially if there is no obvious reason (such as an economic recession or business restructuring).
If there are changes in your business, be sure to prepare relevant proof and explanations to ensure that the figures are documented and verifiable.
The view from TB Accountants
In reality, these errors occur more frequently than you might imagine, and many people often do not realise they have done anything wrong until HMRC comes knocking.
As long as you possess the right knowledge and methods, many traps can be avoided.
The key is to raise awareness and keep good records.
If you have any uncertainty about your tax status, be sure to consult a professional accountant or tax advisor in a timely manner. Getting it right from the start can avoid trouble later on.
For business owners with companies, the HMRC audit process is usually both time-consuming and cumbersome, with complex data requirements and strict standards. For this reason, we recommend consulting with a professional tax advisor.
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