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Under What Circumstances Would HMRC Investigate A Self-Employed Person?

HMRC investigate self employed person

Let’s be clear from the outset – HMRC will only investigate a self-employed person when they have genuine reason to believe they have committed purposeful tax fraud. They will not come after self-employed individuals or get involved in their tax affairs if they see no evidence of a crime. So, if you’re a self-employed person worried about a HMRC tax investigation because of a possible mistake on your self assessments, there is really no cause for concern. Experienced business owners who have chartered accountants handling their business finances will have the odd typo on their tax return.

With all that said, there are times when there is no choice but for HMRC to investigate a self-employed person, even if that investigation amounts to nothing.

HMRC may start an investigation if they see: 

  • Mistakes on the self-assessment tax return
  • Consistent report of no profit for several years
  • Unexplained fluctuations in reported profits
  • No professional help when filing tax returns
  • A tip-off about undeclared income
  • Or to make random compliance checks (this is incredibly rare and is simply part of standard HMRC tax investigations that must be carried out as audits of a random selection of business owners each year)

 

So, can HMRC investigate a self-employed person? Yes. Should you be worried? Well, if it’s a simple typo, then no – you can simply work with HMRC to clear up the mistake. But if you have been carrying out tax evasion as a business owner or you have been deliberately skirting your way around the tax system by hiding your income to avoid income tax, then yes, you should be concerned because you could face a heavy fine and criminal prosecution.

In most cases, though, it’ll be a simple mistake that can be resolved with very little consequence. Below we’ll take a look at different situations in which HMRC may investigate a self-employed person, and explain your next best course of action if you’re notified that HMRC is investigating you.

Reasons For A HMRC Investigation

HM Revenue and Customs may decide to investigate a sole trader in the following scenarios:

tax investigation

They’ve Received A Tip Off

One reason HMRC may investigate a self-employed business person is due to intelligence from another individual who suggests you may be committing a crime. Of course, HMRC are aware that some people may report a business person to them out of spite and with no real cause for concern, so they will look at your tax returns and recent activity to determine the likelihood of the information they have received being true.

If they think there’s a cause for concern, then HMRC may investigate to determine if all business income is being declared as it should be, and that the correct amount of tax is being paid.

Mistakes Have Been Made

Mistakes on self assessments and tax returns are common, and this doesn’t amount to tax evasion. HMRC may, however, look into those errors if they see a pattern of mistakes or omissions in your self assessments.

Common mistakes include:

  • Forgetting to tick a box
  • Skipping entire sections
  • Forgetting to answer certain questions
  • Failing to supply supporting information

 

HMRC will be able to quickly resolve the issue if it’s a genuine mistake on behalf of the self-employed individual.

You Haven’t Made A Profit For Several Years

HMRC know what they’re looking for here. New businesses struggling to make a profit when they first start off is expected, but HMRC may become suspicious if the problem is continuous or there’s been a sudden change in your profits compared to previous years that might suggest underreporting income or overreporting expenses.

Here, investigations will primarily focus on the reported income and business expenses to determine how accurate it is. This is why it’s so important for business owners to keep records, because should an investigation be launched, HMRC would expect you to be able to show evidence of your expenses and income.

If there’s no problem, the investigation will be short and the discrepancies corrected.

Fluctuating Profits

Different profits each year is to be expected. Business turnovers will differ each year and HMRC will expect that.

However, dramatic fluctuations can rouse HMRC’s suspicions. A full investigation into the business and its accounts will usually follow just to confirm the validity of the self assessments and their fluctuating profits. If the returns are accurate, then no further action will follow.

You Don’t Use An Accountant

Let’s be clear: Business owners do not need to use an accountant to file their tax returns and self assessment each year – but if you don’t, your returns may be subject to scrutiny, especially when your turnover is high. When the numbers involved in your business are high, you might not be able to track each transaction effectively, so HMRC will want to make sure that you are.

HMRC have a right to investigate if they think an accounting error has occurred. Making Tax Digital should help alleviate some of these problems from April 2026 when it is due to come in.

What Are The Different Types Of HMRC Investigation?

Depending on the reason for the investigation, HMRC will either carry out what is known as a Full or Aspect Enquiry:

 

Full EnquiryFull Enquiry investigations are reserved for those situations where HMRC have a substantial reason to believe that the problem with your tax returns is potentially not a mere accident, but intentional – such as deliberate under reporting in order to reduce the amount of tax paid.

A full enquiry will involve a deep dive into businesses and their records, and HMRC may ask for additional supporting documents to provide details about the returns previously submitted. If they believe you aren’t reporting your full business income, they can also access your personal financial records to see if your self assessment and personal income align.

Aspect EnquiryAspect Enquiry investigations are only concerned with an aspect of your financial records. This type of investigation is launched when HMRC believes a genuine mistake has been made that simply needs rectifying in the records. A simple investigation will take place where the business owner provides the missing details or corrects the details they have provided mistakenly.

If it is an honest mistake you’ve made, then there is no reason to be concerned if an Aspect Enquiry is launched by HMRC concerning your self assessment tax return.

 

How Often Do HMRC Investigate Sole Traders?

HMRC are not in the business of launching unnecessary investigations into sole traders to try and catch them out – the vast majority of reasons for an investigation we’ve covered today are when a mistake has been made, suspicions have been raised internally with HMRC, or somebody else has reported you. Without a reason to suspect a mistake or intentional dishonesty, HMRC will almost never investigate a sole trader (unless they’re randomly selected one year, which is incredibly rare).

If you have an accountant to minimise reporting errors, or you’re sure the records you have kept and reported yourself are accurate, then you have nothing to fear. Ensure you report your income and expenses accurately when you file your self assessment and keep accurate records of your business transactions after you have filed in case you’re randomly selected or a mistake has been made, and you’ll be able to prove your honest record keeping quickly.

What Happens In A HMRC Investigation?

Should a HMRC tax investigation be launched into your business, you’ll simply need to be prepared. HMRC will either launch a Full or Aspect Enquiry, depending on their suspicions or the problem with your tax returns.

When a full investigation is launched, all of your financial information will be examined, but with an aspect enquiry only one small part will be scrutinised.

HMRC may request access to:

  • Your complete business account records including details of tax calculations
  • Sales invoices
  • Bank statements
  • Documentation of paid taxes
  • Your self-assessment tax returns
  • Full details of expenses incurred with attached receipts
  • PAYE records (if applicable)

 

HMRC will contact you when they believe an issue has occurred with your self assessment. This investigation will then determine if the mistake was honest, or a deliberate manipulation of your financial records. They’ll tell you exactly what information they need from you – or your accountant, if you have one – and then you simply follow their requests. If the mistake was honest, there should be no consequences.

How Do I Know If HMRC Are Investigating Me?

Follow best accounting and tax practices as an independent business and you likely won’t be investigated unless randomly selected for an audit to ensure compliance.

However, if you are under investigation, you will be told. A letter will be received which will detail the type of enquiry (Full or Aspect) and request the necessary information to make the process smoother. This could be anything from your bank statements and sales invoices, to transaction receipts and business expenses. Or a combination of many different parts if a full enquiry is launched.

If you have an accountant, they too will receive notification, so they can start preparing the relevant documents for investigation. This might involve permission to access accounting or business software used to record business information so that HMRC can view the records digitally and move the investigation along quicker.

How Long Does A HMRC Investigation Take?

Depending on the type of enquiry, a HMRC tax investigation can run anywhere from a few days to a couple of months. The information requested will usually have a baring on how long the process will take.

How Far Back Can HMRC Investigate Self Employed Individuals?

Again, it depends on the investigation type and the reason for it.

With Aspect tax investigations, HMRC might only need to view information from the last year to correct a simple mistake. If the Aspect Enquiry leads to more concern, then they may request additional information from previous years.

For a Full Enquiry, HMRC will go back four years as standard, and if further discrepancies are found with your business accounts, and they suspect that the business owner hasn’t been giving full disclosure of their finances for even longer, then there is no legal limit on how far back HMRC can go.

It’s best practice for business owners to keep financial records for as far back as possible to protect them should a Full Enquiry tax investigation be launched into their business.

Outcomes Of A HMRC Investigation

HMRC can conclude in a number of ways. First, they can conclude the problems are solved and no further action is necessary. The business then continues as normal.

However, there are times when manipulation of financial information may be found. In this case, the business will be charged a proportionate fine and will be forced to pay all of their outstanding tax on top of this.

HMRC may deliver penalties if they:

  • Find consistent errors in the account sheets and business records (even if it was unintentional)
  • Prove deliberate omission of important information on tax return documents
  • Confirm an attempt to conceal income

 

tax fraud

A criminal charge of tax fraud may be sought if the sole trader has consistently and deliberately evaded tax, but this is usually reserved for the most extreme cases. Most times, a hefty fine will suffice.

Business owners can appeal HMRC’s decision within 30 days of the conclusion of the investigation should they disagree with their findings.

If found guilty, HMRC may insist upon periodic checks of your financial records to ensure you are filing accurate tax returns and you are fully aware of your responsibility as a business owner.

Do HMRC Always Investigate Tip Offs?

HMRC will never act upon a tip off if there is no cause for concern. Of course, they take every accusation seriously, but if preliminary checks into the sole trader doesn’t rouse suspicion then the sole trader will usually be left alone.

When checking the validity of a tip off, HMRC will usually look over self assessments and tax returns previously filed to ensure they stack up.

If HMRC finds a discrepancy, then an investigation process, like the ones we’ve discussed above, may follow.

Do HMRC Do Random Checks?

HMRC do carry out random checks and audits on different sole traders and businesses each year, but with so many business owners in the UK, the chances of your business being selected is really quite slim.

With that said, you should always be prepared and ensure your financial records are all up to date to avoid complications if you are chosen.

In Summary

As a business owner, it’s important that you get your self assessment right. Mistakes can lead to an investigation, which will likely end up with no further action required for an honest mistake, but can cause a lot of unnecessary stress.

We always recommend using a qualified accountant for self assessment submissions to ensure as high a degree of accuracy as possible.

Whatever you decide to do, you should find comfort in the fact that HMRC don’t actively try to catch honest business owners out. You need only fear HMRC investigations if your tax affairs are not strictly above board.

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