Avoid HMRC Investigations: Top 8 Triggers for Tax Audits in the UK

The thought of HMRC tax audits can be a source of anxiety for any business owner in the UK. And at Ellis & Co, we believe that knowledge is power. Which is why understanding why HMRC might choose to investigate your tax affairs is the first crucial step in proactive preparation and minimising your risk!

While some HMRC compliance checks are random, many are triggered by specific anomalies or “red flags” that stand out from the norm. So what are they?

Let’s delve into the common triggers that could lead to an HMRC audit:

1. Inconsistent or Unusual Figures: The Financial Outliers

One of the quickest ways to catch HMRC’s attention is through figures that don’t quite add up. This includes:

• Significant Fluctuations: Sudden, unexplained spikes or drops in income, expenses or profits from one year to the next. This is especially if they deviate wildly from your historical performance or industry averages. 
• Discrepancies: Inconsistencies between different parts of your tax return, or between your tax return and information HMRC receives from third parties (for example: banks and other businesses you deal with). 
• Unrealistic Ratios: For instance, unusually high expenses compared to your declared income, or a consistently low gross profit margin compared to similar businesses in your sector. Take note that HMRC uses sophisticated data analytics, so they will be able to compare your figures against benchmarks.

These anomalies can raise questions, and in some cases, might even be linked to potential money laundering activities, which may prompt a more serious investigation.

2. Consistently Reporting Losses: The Unviable Business Question

While every business can experience genuine periods of loss, consistently reporting losses year after year can raise a red flag with HMRC. They might question the commercial viability of your business and whether it’s truly operating with a view to making a profit.

Even if the losses are legitimate, HMRC might want to understand the underlying reasons and ensure that all expenses claimed are wholly and exclusively for business purposes.

3. Late or Incorrect Filings: The Administrative Mishaps

This is one of the most common and easily avoidable triggers! 

Missed deadlines or recurring errors in your Self Assessment, Corporation Tax, VAT or PAYE returns are immediate red flags that signal a potential lack of due diligence.

As HMRC operates on strict timelines, a pattern of late submissions or frequently amended returns can prompt them to take a closer look at your overall compliance.

4. Discrepancies Between Reported Income and Lifestyle: The “Flashy” Factor

This is a more personal trigger, but one that HMRC can certainly investigate. 

And what we mean by that is if your declared business income and personal wealth appear significantly out of sync with your visible lifestyle (e.g. luxury cars, multiple properties, frequent expensive holidays), HMRC may suspect that not all income is being declared.

Take note that this often comes to light through public information, third-party reports and even social media.

5. High-Risk Industries: Increased Scrutiny for Certain Sectors

Certain industries inherently face increased scrutiny from HMRC due to their nature, especially those with a high volume of cash transactions or complex supply chains. Examples often include:

• Hospitality: Restaurants, pubs, takeaways.
• Construction: Particularly due to the CIS scheme.
• Retail: Shops with significant cash sales.
• Hair and Beauty: Salons, barbers, therapists.
• Banking & Financial Services: Due to the complexity and high value of transactions. This includes cryptocurrency.

If your business operates in one of these “high-risk” sectors, proactive and meticulous record-keeping is even more crucial.

6. Tip-Offs: The Unseen Trigger

Unfortunately, HMRC do act on information received from the public. While it’s an unpleasant thought, tip-offs – even malicious or unfounded ones – from disgruntled former employees, competitors or even members of the public can initiate an investigation into your business.

HMRC will assess the credibility of the information, but even a vague tip can lead to an initial review of your records. Hence, it’s always good to err on the safe side where everything is audit-ready!

7. Errors in Previous Audits or Returns: The Follow-Up Check

If your business has been audited before and issues were uncovered (even minor ones that resulted in adjustments), you might be flagged for a follow-up check. 

HMRC often monitors businesses that have previously shown compliance issues to ensure improvements have been made. Similarly, if errors were found in one tax return, like in VAT, it might prompt an investigation into other tax heads (e.g. Corporation Tax).

8. Not Having Professional Representation: The Perceived Risk

While not a direct trigger in itself, HMRC often views businesses without professional accountancy representation with more scrutiny. This is because they may assume that businesses handling their own complex tax affairs are more prone to genuine errors or oversights.

Hence, by having a qualified accountant like Ellis & Co, it’ll help indicate that your business has a higher level of financial organisation and compliance. 

Proactive Protection: How Ellis & Co Can Help

Understanding these triggers is the first step, but proactive preparation is your best defence. And at Ellis & Co, we help businesses across Chester, Wrexham, North Wales and the North West with the following:

• Maintain Impeccable Records: We can help you set up robust bookkeeping systems, whether traditional or cloud-based, to ensure all transactions are accurately recorded and easily accessible.
  
  Read more about “The Key Benefits of Outsourcing Your Bookkeeping” to find out how an expert accountant helps you grow your business. 
• Ensure Timely & Accurate Filings: Our expert team ensures your tax returns are submitted correctly and on time, every time. Thus, minimising the risk of administrative penalties and red flags. 
• Provide Strategic Tax Advice: We help you understand allowable expenses, maximise legitimate tax reliefs and navigate complex tax rules. All of which reduces the chance of errors that could trigger an audit. 
• Offer Expert Representation: Should HMRC initiate an audit, Ellis & Co will stand by your side. To ensure peace of mind, we’ll communicate directly with HMRC on your behalf, and this would include providing all necessary documentation and negotiating the best possible outcome. Overall, alleviating your stress and protecting your interests.

While identifying these triggers is essential, your best defence against a HMRC audit is solid, proactive preparation. Which we at Ellis & Co can help you navigate. Here, we’re more than just accountants. We’re your partners in financial peace of mind. So let us help you ensure your business is not just ready for any HMRC enquiry, but thrives with robust, audit-proof financial practices.

Get in touch with our team now for a no-obligation consultation about your tax needs. Don’t wait for a letter from HMRC to start thinking about your records!

About Ellis & Co

Ellis & Co is a leading accountancy firm specialising in accountancy & audit, bookkeeping, payroll, tax planning and business advisory services. We work with a diverse range of businesses, from start-ups to established companies, ensuring they have the financial clarity and support they need to succeed. With our team of experienced accountants based in Chester and Wrexham, we are proud to offer personalised solutions that help businesses succeed.