What is an HMRC audit? What to expect and how to prepare

No one likes surprises, especially the kind that show up in the form of HMRC tax investigations. If you’re a business owner, getting notified of a tax audit can spark all kinds of questions and maybe a few worries. To reassure you, let’s start by saying that audits aren’t always bad news. And if you’re prepared, they don’t need to disrupt your business or your peace of mind.

An HMRC audit, officially known as a HMRC compliance check, is a formal check-up on your financial and tax records. It’s how HMRC ensures businesses are paying the right amount of tax and staying compliant with UK tax law. The process is often more structured and manageable than many people expect.

In this guide, we’ll walk you through the types of audits HMRC might carry out, what triggers them, how far back they can go and most importantly, how to get prepared so you can take it in stride.

What happens during an HMRC audit?

An HMRC audit is typically issued with a letter letting you know that your business has been selected for review, in rare cases, it can also be an email or phone call. From there, HMRC will outline what records or information they want to inspect. This could include:

• Your most recent tax return and supporting calculations
• Business bank statements
• Sales and purchase invoices
• PAYE records (including payroll, RTI submissions and benefits in kind)
• VAT returns and supporting documentation
• Self Assessment records (for sole traders or partnerships)

Depending on the scope of the audit, HMRC may conduct the audit remotely (i.e. reviewing documents you send them) or carry out a site visit to your premises. They may also request interviews with you or your team to clarify how certain parts of the business operate or how figures were calculated.

Once the audit is complete, HMRC will issue a decision. The outcome could be:

• A clean bill of health, where no further action is needed.
• If there are errors, a correction or adjustment where the HMRC will ask for revised filings and payment of any underpaid tax.
• In more serious cases, a penalty notice if the HMRC finds that there’s been negligence or deliberate misreporting.

Throughout the process, cooperation, clear communication and accurate records will help speed things up and reduce stress. Later on, we’ll get into how you can prepare for these audits, and better yet, how to steer clear of them altogether.

What are the different types of HMRC tax audits?

The type of audit you experience will depend on what prompted the review and how deep HMRC feels it needs to dig. These typically come in the following:

1. Full enquiry

A full enquiry is the most comprehensive type of audit. HMRC will look into every aspect of your tax return and financial records. These are initiated if HMRC suspects there’s a serious risk of tax underpayment, or inconsistencies that suggest widespread issues. It might involve years of documentation and multiple departments of your business.

If your business is subject to a full enquiry, it’s best to involve a qualified tax adviser or accountant early in the process.

2. Aspect enquiry

This type of audit focuses on a specific area of your return, perhaps a large expense claim, a property sale, or an unusual transaction. It’s less invasive than a full enquiry and often quicker to resolve, provided you can supply the requested documentation.

We’ll cover this a lot, but record keeping is going to be your biggest asset when handling the HMRC audit process.

3. Random check

These checks are genuinely random and not triggered by any suspicion or mistake. They are designed to keep compliance fair across all businesses, regardless of size or industry. Even if your records are accurate and everything is in order, you could still be chosen at random. This is different from risk-based checks, which HMRC conducts separately when specific concerns are identified.

Can businesses minimise the risk of an HMRC tax inspection?

You can’t completely eliminate the possibility of an audit, as we mentioned, they can be routine and unprompted. That said, there are steps you can take to lower your risk significantly, especially surrounding audits that are triggered by your business activity.

Understanding your tax obligations

The most important way is knowing which taxes apply to your business, and what your obligations are. If you are following your employer and tax law obligations, there won’t be anything to find if the HMRC comes knocking.

Depending on your structure and activities, you may be responsible for:

• Corporation tax: For limited companies
• VAT: If your turnover exceeds the registration threshold
• PAYE and National Insurance: If you employ staff
• Self Assessment: For sole traders, partnerships and company directors

If you’re unsure what tax obligations your business should be adhering to, then it might be time to get in touch with an expert.

Keeping clean, accurate records

Like we promised, record keeping is going to be one of your highest priorities. It can prove your business is meeting its obligations, and speed up the auditing process. HMRC expects businesses to maintain detailed, organised records, which includes:

• Digital copies of receipts, invoices, and bank statements
• Up-to-date payroll data
• Correctly categorised expenses
• Accurate mileage and travel logs
• Consistent reconciliation of accounts

Using cloud-based accounting software is one of the easiest ways to stay compliant. It automates many of the tasks that can trip businesses up, like VAT returns, RTI reporting and invoice tracking.

Filing on time and reviewing returns

Late or rushed submissions are a red flag for HMRC. Give yourself enough time to review your filings carefully and make sure they align with your records. Avoid rounding up or guessing figures, it’s safer to be exact and conservative.

If you make a genuine mistake, correcting it quickly can reduce or even eliminate penalties.

How far back can HMRC audit?

HMRC has the authority to review previous tax years, and how far back they go depends on the circumstances:

• Up to 4 years: For innocent errors or standard reviews
• Up to 6 years: If HMRC suspects carelessness
• Up to 20 years: For deliberate tax avoidance or fraud

This is why good recordkeeping isn’t just for the current financial year. HMRC expects businesses to keep records for a minimum of 6 years, though in some cases (e.g. property or capital gains), longer retention may be advisable.

How often does HMRC audit self-employed individuals?

Self-employed workers are a frequent focus for HMRC, mainly because their income and expenses are self-reported, and there’s no third party like an employer to verify them.

You’re more likely to be audited if:

• Your business handles lots of cash
• Your expenses are unusually high or inconsistent
• You submit late or amended returns frequently
• You’ve filed inconsistent or late self assessment tax returns
• Your income fluctuates in ways that aren’t explained

That said, many sole traders and freelancers never experience an audit. Being transparent and accurate with your reporting goes a long way to staying off HMRC’s radar.

Does HMRC do random audits?

Yes. Even if your business has done everything by the book, there’s still a chance you could be selected for a random check.

This might seem frustrating, but it’s simply part of HMRC’s strategy to monitor trends and encourage universal compliance. If your records are well-organised and your returns are honest, you’ll be able to respond confidently and get through the process.

What triggers an HMRC audit?

Certain red flags can increase the likelihood of an audit, especially if they appear consistently or without explanation. HMRC uses data-matching tools to spot anomalies across returns, so even minor discrepancies can catch their attention.

While not every inconsistency will trigger a tax investigation, businesses that show repeated patterns or clear errors are more likely to come under scrutiny. These include:

1. Inconsistent or incorrect figures

Discrepancies between different sections of your return, or between returns submitted in different years, can catch the attention of HMRC.

2. Businesses in a high-risk industry

Some industries, like hospitality, construction or trades, are considered higher risk due to the prevalence of cash payments and subcontracting.

3. Tip-offs or complaints

HMRC can act on reports from the public, including ex-employees, business partners or even competitors.

4. Frequently late tax returns

Chronic lateness can signal poor compliance habits or underlying financial issues.

5. Unusual or outlier data

If your reported figures differ significantly from industry benchmarks, it may prompt further scrutiny.

6. Large VAT reclaims

Frequent or high-value VAT refund requests can be a red flag for potential overclaiming or fraud.

7. Low reported income with high turnover

This may suggest underreporting of profits or the use of creative accounting practices.

In most cases, it’s not one single issue that prompts an audit, but a pattern of risky behaviour or unclear reporting. Each of these scenarios increases your chances of a tax audit or tax investigation.

What happens if you overpay?

If HMRC determines that you’ve made an error in your return resulting in overpaid tax, you may be eligible for a refund. However, claims must be submitted within specific time frames, usually four years from the end of the relevant tax year.

What is an assessment tax return?

An assessment tax return is HMRC’s calculation of what you owe when they don’t receive your return, or believe it’s incorrect. If you don’t agree, you must appeal within 30 days. Always double-check your tax calculations and respond quickly.

Why accurate records and professional advice matter

When it comes to passing an HMRC audit, preparation is everything. One of the most effective ways to protect your business is by keeping thorough accounting records and making sure your tax affairs are always in order. We can’t say it enough, poor recordkeeping is one of the fastest ways to raise red flags with HMRC. Any inconsistencies could increase your tax liability, or even raise suspicions of tax fraud.

A trusted legal adviser or accountant can guide you through the audit process and help prepare a solid response. If HMRC does uncover errors, you may have to pay interest on any unpaid tax, which can add up quickly. That’s why every company tax return should be checked carefully before submission.

And if you’re keen to spend more time running your business, and less time stressing about payroll or recordkeeping, Employment Hero can help. Our all-in-one platform supports UK businesses with automated HR, digital payroll and helpful templates that make staying audit-ready simpler than ever.