HMRC tax investigation: what to expect and your rights

Receiving an HMRC tax compliance check letter can be unsettling, but understanding the process and navigating tax law is the most effective way to manage it. HMRC routinely reviews returns to ensure accuracy. Because UK tax laws are complex, honest mistakes are common. Whether you are facing a routine enquiry or a serious investigation by the Fraud Investigation Service (FIS) under Code of Practice 9, knowing your rights is critical. This guide, updated with the June 2023 HMRC standards, explains the process, the strict 60-day rules of the Contractual Disclosure Facility (CDF), and why specialist legal representation is vital.

QUICK ANSWER: What happens when HMRC opens a compliance check?

An HMRC compliance check (or “tax enquiry”) is a formal review of your tax position. HM Revenue and Customs examines your returns to ensure accuracy, verify tax reliefs, and discourage evasion. You will receive an official notification letter.

While you must cooperate, you retain legal rights, including the right to professional representation and the right to be treated fairly and politely.

Common reasons HMRC opens a compliance check

HMRC reviews tax returns to ensure accuracy. While some compliance checks are completely random, most are risk-based and triggered by automated data systems.

Certain factors significantly increase the likelihood of your affairs being flagged:

• Inconsistent figures: Tax returns showing unusual or outlier patterns compared with previous years, such as a sudden drop in profit margins.
• Large VAT refunds: Claims that seem disproportionate to overall business turnover, which can suggest inflated input tax.
• Persistent losses: Reporting low tax liabilities or continuous business losses despite maintaining an active, successful operation, which may draw scrutiny under UK commercial law principles.
• Third-party discrepancies: Mismatches between your self-declared figures and data provided by banks, property agents, or online marketplaces.
• Public digital footprint: Social media posts or luxury asset ownership that contradict your reported income or suggest an unexplained lifestyle.
• High-risk sectors: Businesses operating in cash-based retail, hospitality, or industries where HMRC identifies frequent tax gaps.
• Grant claims: Applications for government financial support where eligibility criteria may not have been fully met.
• Overseas income: Omissions of income from worldwide assets flagged via international data-sharing agreements.

Aspect enquiries and full enquiries explained

HMRC will specify the scope of the check in their initial letter:

• Aspect enquiry:A focus on specific details, such as a single large business expense or a specific relief claim.
• Full enquiry:A comprehensive review of your entire tax return and financial records. For companies, this often includes a review of the directors’ personal financial affairs.

How HMRC handles information requests

During a check, the officer will request evidence to support your tax return. HMRC might ask you to:

• Send documents (bank statements, invoices, or accounting extracts).
• Meet with them to discuss your tax affairs (you have the right to refuse a meeting, though cooperation is encouraged).
• Permit an inspection of your business premises, assets, and records.

If you fail to comply with a formal information notice, HMRC can charge financial penalties unless you have a “reasonable excuse”, such as serious illness or bereavement.

The difference between civil and criminal investigations: COP9

According to the June 2023 Code of Practice 9 (COP9), the Commissioners for HMRC reserve complete discretion to pursue a criminal investigation with a view to prosecution. FIS (Fraud Investigation Service) handles cases where fraud is suspected.

HMRC policy is to use civil investigation procedures wherever possible. However, they can and may commence a criminal investigation if:

• You do not respond to the COP9 offer within the deadline.
• You reject the offer and HMRC continues to suspect fraud.
• You make an incomplete or false disclosure.
• You provide materially false or misleading statements or documents during the investigation.

Understanding “Deliberate Behaviour” (2023 definition)

The 2023 update clarifies that tax fraud requires “dishonest deliberate behaviour”. You cannot commit tax fraud by accident. Under COP9, deliberate behaviour means:

• You submitted documents to HMRC containing information you knew was incorrect.
• You did not tell HMRC at the right time about information relevant to a tax liability.
• You made a claim for a payment (including grants or financial support) to which you knew you were not entitled.

COP9 now explicitly covers not just tax, but also fraudulent claims for targeted financial support and grants administered by HMRC.

The Contractual Disclosure Facility (CDF) and the 60-day rule

The CDF is a contract between you and HMRC. If you accept the offer and make a full disclosure of your deliberate behaviour, HMRC commits not to open a criminal investigation.

• The 60-day Deadline:You have exactly 60 days from the date you receive the offer to accept or reject it. There is no extension for this decision.
• Outline Disclosure:Within the same 60 days, you must provide a valid Outline Disclosure. This must describe what you did, how you did it, and the involvement of other entities.
• The Four Mandatory Documents:To complete a Formal Disclosure, you must sign four specific templates that cannot be amended:

1. 1. A Certified Statement of worldwide assets and liabilities.
   2. A Certificate and Schedule of all financial accounts operated.
   3. A Certificate and Schedule of all financial cards operated.
   4. A Certificate of Full Disclosure (your signature must be witnessed).

Open source material: How HMRC monitors your digital footprint

A significant addition to the 2023 COP9 guidance is the use of open source material. HMRC may observe, monitor, and record internet data available to the public. This includes:

• News reports and internet sites.
• Companies House and Land Registry records.
• Blogs and social networking sites (where no privacy settings are applied).

HMRC uses this data to cross-reference your lifestyle and business activities against your tax disclosures.

Interviews under caution: what you need to know

If HMRC decides to bypass the civil COP9 route or if a civil case escalates, you may be required to attend an interview under caution. This is a formal criminal procedure conducted under the Police and Criminal Evidence Act (PACE).

• The Caution:You will be told: “You do not have to say anything. But it may harm your defence if you do not mention when questioned something which you later rely on in court.”
• The Risks:Anything you say is recorded and can be used as evidence in a criminal trial.
• The Right to Silence:While you have the right to remain silent, a court may draw “adverse inferences” from your silence if you later rely on a fact you didn’t mention during the interview.
• Representation:You have a legal right to have a specialist solicitor present. They will obtain “pre-interview disclosure” from HMRC to understand the evidence against you before the questioning begins.

Potential outcomes, penalties, and the 20-year rule

By entering a CDF contract, you admit to deliberate behaviour. This gives HMRC the power to recover tax, interest, and penalties for as far back as 20 years.

Potential outcomes include:

• Closure Notice:A formal document ending the check.
• Financial Penalties:These are a percentage of the tax lost. For deliberate errors, penalties may reach up to 200% of the tax due (for offshore matters), or up to 100% for domestic deliberate errors, but they may be reduced if you cooperate fully.
• Publication of Details:HMRC may publish your name and details as a “deliberate defaulter” if you do not cooperate fully from the outset.
• Managing Serious Defaulters:You may be placed on an enhanced monitoring programme to ensure future compliance.

Filing a formal complaint about HMRC service

If you experience poor service, unreasonable delays, or professional mistakes, you can file a complaint or explore methods of Alternative Dispute Resolution (ADR).

• First-tier review:HMRC investigates the service failure. They may refund costs like professional fees or postage caused by their mistakes.
• Second-tier review:A different officer reviews the handling of the complaint.
• Adjudicator’s Office:An independent, free service if the internal HMRC reviews do not resolve the issue.

Case example (Buzzacott, COP9 case study):

An unrepresented taxpayer accused of serious fraud initially tried to handle a COP9 investigation alone, insisting he had never acted dishonestly but not understanding why HMRC suspected him. Once specialist advisers took over the case, they were able to demonstrate that any errors stemmed from a simple lack of care rather than deliberate wrongdoing, and HMRC’s suspicions were ultimately shown to be unfounded. The case is a direct illustration of the point above: specialist representation may be the difference between a fair outcome and an unnecessary admission of fraud.

FAQs

What happens if I withdraw my admission of deliberate behaviour?

Under the 2023 rules, if you accept the CDF and later claim your behaviour was not deliberate without a good reason, HMRC will treat this as a “repudiation” of the contract and may start a criminal investigation.

Can COP9 be used for COVID-19 grants?

Yes. The 2023 guidance clarifies that COP9 covers fraudulent claims for payments administered by HMRC, which includes various financial support schemes and grants.

What is a “Formal Disclosure”?

It is the stage after the Outline Disclosure where you provide a detailed Disclosure Report and the four mandatory certified documents to fully settle your tax position.

The June 2023 update to COP9 reinforces the contractual nature of tax fraud investigations. With the 60-day “take it or leave it” offer and the expansion into open-source monitoring, the margin for error is extremely limited. Early cooperation, meticulous record-keeping, and specialist legal advice are the only ways to navigate these powers and avoid the risk of criminal prosecution.

This guide provides general information only and does not constitute legal advice.

Is HM Revenue and Customs scrutinising your tax affairs? Do not risk hefty financial penalties or a criminal investigation by facing them alone. Qredible’s network of specialist solicitors can help you protect your rights, challenge unreasonable demands, and negotiate the best possible settlement.

KEY TAKEAWAYS:

• 60-Day Deadline:You have exactly 60 days to accept the CDF offer and provide an Outline Disclosure. Failure to do so risks a criminal investigation.
• Deliberate Behaviour:This includes dishonest actions like lying on returns or claiming grants you weren’t entitled to. It allows HMRC to look back 20 years.
• Open Source Monitoring:HMRC now explicitly uses social media, news, and public records to check the honesty of your disclosures.
• The CDF Contract:If you are open and honest about all irregularities, HMRC legally commits not to prosecute you for that behaviour.
• Four Mandatory Documents:You must use HMRC’s specific templates for assets, bank accounts, and cards to complete the process.