HMRC Tax Audits and Compliance Checks in the UK

A tax audit, more commonly referred to by HM Revenue & Customs (“HMRC”) as a tax compliance check, is a review of an individual’s or organisation’s tax affairs to determine whether the correct amount of tax has been declared and paid.

HMRC may conduct compliance checks into the tax affairs of companies, partnerships, sole traders and individual taxpayers, including directors and investors. A check may concern a specific transaction or tax return, or it may involve a broader examination of the taxpayer’s affairs. It can cover, among other matters, Corporation Tax, Income Tax, Capital Gains Tax, VAT, PAYE and National Insurance contributions.

Receiving notice of a compliance check does not necessarily mean that HMRC believes wrongdoing has occurred. Factors that may lead to a compliance check include apparent inconsistencies in a tax return, information obtained from third parties, unusual transactions, identified sector-specific risks or HMRC’s wider compliance activity.

Legal and Regulatory Framework

HMRC has statutory powers, subject to applicable conditions, safeguards and limitations, to enquire into tax returns, require information and documents, inspect certain premises and, in appropriate circumstances, obtain information from third parties. Therefore, taxpayers are generally required to cooperate with lawful information requests and to retain appropriate records. However, they may challenge requests that are unclear, disproportionate, legally defective or fall outside HMRC’s powers. Special considerations may arise where documents contain legally privileged or confidential information relating to third parties.

If HMRC identifies an underpayment, it may seek recovery of the outstanding tax together with interest and, where applicable, penalties. The level of penalty may be influenced by factors such as the nature of the inaccuracy, whether it was careless or deliberate, whether the disclosure was prompted or unprompted, and the extent of the taxpayer’s cooperation. The decisions, conclusions, assessments reached by HMRC may be subjected to review, appeal or alternative dispute resolution, depending on the nature of the case.

The Tax Audit Process

A compliance check will usually begin with a letter or other communication from HMRC identifying the relevant tax, accounting period and transaction under review. HMRC may request documents, accounting records, explanations or details of specific arrangements.

The principal stages commonly include:

1. Reviewing HMRC’s notification and establishing the scope and legal basis of the check
2. Identifying and examining relevant records, including accounts, tax returns, contracts, correspondence and transaction documents
3. Responding to information requests accurately, consistently and within the applicable deadlines
4. Supporting or representing the taxpayer during meetings and, where appropriate, inspections
5. Addressing HMRC’s preliminary findings and correcting any factual or legal misunderstandings
6. Engaging with HMRC regarding the resolution of disputed factual or legal issues and any resulting liability for additional tax, interest or penalties, and
7. Seeking review, alternative dispute resolution or bringing an appeal, where HMRC’s decision is disputed

The scope and potential duration of a tax audit within the United Kingdom can vary considerably. Early preparation, consistent communication and a clear documentation record and directory can help prevent unnecessary delay and reduce the risk of misunderstanding.

How we can assist

Our expert team in our London office is fully prepared and willing to assist companies, individuals, investors, and directors with the legal aspects of HMRC compliance checks and any potential tax-related disputes.

We can assess HMRC’s correspondence, clarify the scope of the investigation, advise on the taxpayer’s rights and obligations, and the expected procedural timeline. We can also help collect and review relevant documentation, manage communication with HMRC, prepare responses concerning legally sensitive/focused matters and support clients during meetings or inspections.

Where a matter involves complex corporate arrangements, investments, restructurings or reorganisations, shareholder relationships or cross-border transactions, we can examine the underlying legal documentation and provide a clear and precise explanation to HMRC about the prevailing commercial and legal context. We advise on the legal and procedural aspects of the compliance check and work alongside the client’s accountants or specialist tax advisers where tax computations, return preparation or accounting evidence are required.

If HMRC proposes an additional assessment or penalty, we can evaluate the legal and evidential basis of its position, assist with representation and negotiation, and advise on the available routes for review, alternative dispute resolution or appeal.

As an international and multilingual law firm, we are particularly well placed to assist clients whose affairs involve more than one jurisdiction. Our team can provide support in English, Hungarian, German, Spanish, Russian and Turkish, helping overseas and domestic clients with equal fluency and expertise to understand the UK process and communicate effectively with the relevant professionals and authorities. This can be instrumental in resolving the tax compliance check in a timely and seamless manner.

Early legal assistance can make a tax audit more manageable, protect the taxpayer’s procedural position and help bring the matter to an efficient and commercially sensible conclusion.