General principles: HMRC enquiries and compliance checks ….
1. Self‑assessment and HMRC’s right to enquire
1.1 Nature of self‑assessment
○ Companies are on a system of corporation tax self‑assessment and are responsible for calculating their own corporation tax liability, submitting accounts and returns by the due date.
○ HMRC initially checks returns only for arithmetical issues and will treat the return as correct, subject to its right to enquire into the return within a statutory window.
1.2 Formal enquiries into returns
○ For corporation tax, HMRC may make an enquiry into any return; this may be random or targeted because HMRC believes the return is inaccurate.
○ For income tax self‑assessment, an enquiry may be made into any tax return; anything beyond correcting an obvious error (e.g. arithmetic) must use the formal enquiry procedure.
○ There is no such thing as an informal enquiry into a return: if HMRC wishes to go beyond simple corrections, it must open a formal enquiry, and it can only open one enquiry into any given return.
1.3 Enquiry windows (time limits)
○ HMRC must issue a formal enquiry notice within the statutory enquiry window.
○ For an individual’s income tax return, the general rule is that HMRC has 12 months from the date the return is submitted to commence an enquiry, with special rules where a return is late or amended (using “quarter‑days” of 31 January, 30 April, 31 July and 31 October).
○ For a company’s self‑assessment return, the enquiry window normally closes 12 months after filing, with variants for medium/large groups, late‑filed returns and amended returns (again using the quarter‑day mechanism).
These rules define when HMRC can turn a “concern” or a risk into a formal enquiry notice.
2. Compliance checks as a broader category
2.1 Definition and scope
○ A compliance check is defined as any action taken by HMRC to check a person’s tax position and can range from a short telephone call to confirm a simple fact to a full, detailed investigation over several years.
○ Where a self‑assessment return has already been submitted, any check on a matter dealt with in that return can only be undertaken by opening a formal enquiry into that return.
○ However, HMRC can carry out compliance checks even before a return is submitted, using its powers to inspect premises and documents in order to spot errors early and gather information on tax planning.
2.2 Duration and timing
○ The time window for a compliance check is “very wide”: a check can begin before a return is submitted and can continue after the normal enquiry window has closed, provided it is still within the time limits to issue assessments or determinations to recover tax.
Thus, a “compliance check” is a much broader concept than a formal enquiry, but the triggering factors overlap substantially.
Specific triggers and risk factors
3. Random selection and risk‑based profiling
3.1 Random enquiries and checks
○ HMRC has explicit power to make an enquiry into any corporation tax return “either selected at random or specifically chosen” because it believes the return to be inaccurate.
○ For corporation tax, HMRC materials note that although a limited number of random enquiries are made each year, most cases are now identified through risk‑assessment of the returns filed.
○ For income tax, while a few random enquiries are still undertaken, an enquiry is usually an indication that HMRC considers the return incorrect or incomplete.
3.2 Risk‑assessment mechanisms
○ Under the self‑assessment regime, every corporation tax return undergoes a risk assessment so that certain returns can be targeted for enquiry.
○ HMRC also uses its general powers to look at documents and inspect premises to conduct compliance checks even before returns are submitted, which allows it to identify risks at an early stage.
So, one major category of trigger is simply that your return scores “high risk” under HMRC’s profiling systems, or you are one of a small sample chosen purely at random.
4. Inaccuracies, omissions or unusual entries in returns
4.1 HMRC’s view that a return is incorrect or incomplete
○ For income tax, guidance indicates that while some random enquiries exist, in practice an enquiry is usually a sign that HMRC thinks the return is either incorrect or incomplete.
○ For both income tax and corporation tax, anything beyond simple correction of an obvious error requires HMRC to invoke the formal enquiry procedure, which reflects that HMRC believes something in the return needs checking.
4.2 Discovery assessments (where issues arise after the enquiry window)
Although your question is about what triggers an enquiry or compliance check, it is useful to note how HMRC acts if a risk is perceived after the normal enquiry window:
○ Discovery assessments can be issued if there is a loss of tax due to careless or deliberate conduct, or if HMRC could not reasonably have been expected to be aware of the facts causing an underpayment, based on information available when the enquiry window closed.
○ Information is treated as “available” if it is in returns or supporting documents for the current and two preceding years, claims for the year, or documents provided during an enquiry.
This matters because, in practice, apparent omissions, inconsistent figures, or unexplained large items in accounts or returns are precisely the sort of features that lead HMRC either to open an enquiry within time, or later to consider a discovery assessment after further compliance checking.
5. Late filing, amendments, and repayment/instalment issues
5.1 Late‑filed or amended returns
○ Where returns are filed late or amended (including later claims), the enquiry window is extended to the quarter day following the first anniversary of filing or of the amendment.
○ If an enquiry is opened only after what would have been the original deadline, and only because there were amendments, the scope of the enquiry is restricted to the amendments.
While late filing or frequent amendments are not labelled explicitly as “triggers”, the law reflects HMRC’s expectation that such cases may warrant more scrutiny, by giving HMRC extra time to enquire.
5.2 Quarterly instalments for large companies
○ HMRC has specific powers to seek information about a large company’s quarterly instalment calculations after the filing date, to check whether payments were consistent with the information available at the time, whether any non‑payment was reasonable, and whether any claim for repayment was properly made.
○ HMRC may ask to see books and records for these purposes and sees interest on underestimated instalments as the main incentive to pay correctly; enquiries are said to be appropriate where HMRC believes the company has deliberately or recklessly failed to make payments in line with its own information or has made fraudulent or negligent repayment claims.
Thus, late or inadequate payments, or aggressive repayment claims, especially by large companies, are likely to be risk factors leading to an information request or compliance check.
6. Compliance checks based on suspicion of tax loss
○ Even after the enquiry window has closed, HMRC can still undertake compliance checks if it has reason to suspect that tax has been lost and the time limit for an assessment has not expired.
○ If the assessment time limit has expired, a compliance check will only be worthwhile if a discovery assessment is still possible (for example, because of careless or deliberate behaviour).
A trigger in this category is typically some external information or internal analysis that suggests under‑declared profits, unreported income, excessive reliefs, or other non‑compliance.
7. Third‑party information (banks, intermediaries, others)
7.1 General third‑party notices
○ For VAT supervision and control (but using powers that are typical of HMRC’s wider information regime), HMRC can issue third‑party notices for information about a known taxpayer’s position, with either the taxpayer’s consent or First‑tier Tribunal approval.
○ The tribunal will only approve such notices where:
■ the application is by or with permission of an authorised officer;
■ the tribunal believes the notice is justified;
■ the third party has been told what is requested and had a chance to object (unless this would prejudice tax collection); and
■ the taxpayer has been told why the notice is sought (again, subject to limited exceptions).
This shows how HMRC can use third‑party notices to confirm or disprove suspicions about a taxpayer’s behaviour, which can in turn feed into decisions to open a formal enquiry or further compliance check.
7.2 Notices where taxpayer’s identity is not known
○ HMRC may also issue third‑party notices where the taxpayer’s identity is not known but the notice will allow checking the tax position of unknown taxpayers, provided that:
■ there are reasonable grounds to believe that there has been a compliance failure by at least one taxpayer in the class;
■ this failure has led, or is likely to lead, to serious prejudice to the collection of tax; and
■ the information requested is not readily available from other sources.
These powers allow HMRC to identify patterns of evasion in particular sectors or customer groups, which may then trigger targeted enquiries into specific taxpayers once identified.
7.3 Data‑rich third‑party sources (card acquirers, intermediaries, etc.)
○ HMRC can demand tax‑relevant information from a wide range of third parties, including:
■ merchant acquirers (credit card processors);
■ aggregators;
■ business intermediaries (especially online);
■ electronic payment service providers (digital wallets); and
■ money service businesses (money transfer, currency exchange, etc.).
○ HMRC can require information about card sales made by retailers (including name, address, VAT number, bank details) for periods up to four years back, and uses this information to cross‑check against VAT returns and business income declared on tax returns.
In practice, discrepancies identified from these third‑party sources (for example, card turnover well in excess of reported sales) are classic triggers for a compliance check or a formal enquiry.
7.4 Example: bank statements as statutory records
○ A tribunal case concerning a taxpayer’s bank statements illustrates that where an account is effectively used as a business account and nominated as such to HMRC, statements may be treated as statutory records required under VAT law, meaning there is no right of appeal against a notice requiring them.
This underlines how HMRC’s third‑party powers support compliance checks where they suspect that hidden business takings or other undeclared income are flowing through personal or mixed‑use accounts.
8. Past compliance history and cooperation
8.1 General emphasis on information access
○ In the penalty regime, HMRC explicitly values taxpayers who give prompt and free access to information, with up to a 30% penalty reduction for co‑operation; the guidance indicates that if HMRC must resort to formal information powers, the full reduction is unlikely and in some cases no reduction may be given.
Although not labelled as a “trigger” for opening a new enquiry, this reflects HMRC’s wider risk‑based approach:
○ taxpayers with a history of co‑operation and accurate reporting are more likely to be considered low risk;
○ repeated penalties, refusals to provide information voluntarily, and previous inaccuracies are likely to increase risk scores, making future compliance checks and enquiries more probable.
8.2 Overpayment relief and reasonable care
○ HMRC guidance on overpayment relief emphasises that a taxpayer is expected to take reasonable care and to seek and follow advice where uncertain; each case is considered on its facts, but HMRC expects that obvious uncertainty should prompt advice‑seeking.
A track record of failing to take reasonable care (for example repeated careless errors) tends to feed into HMRC’s risk assessment, increasing the likelihood of further checks.
9. Compliance checks before filing and cross‑tax activity
○ HMRC’s harmonised powers to inspect documents and premises permit it to conduct compliance checks before any return is submitted, allowing errors to be detected and tax planning information collected early.
○ VAT officers and direct tax officers can exchange information, so findings in one tax area can lead to investigations and even discovery assessments in another (as confirmed in tribunal cases where VAT investigations led to corporation tax discovery assessments).
This means that a problem in one tax or business area (e.g. under‑declared VAT) may trigger checks and enquiries into income tax or corporation tax as well.
Application: what this means for you in practice
From the UK rules and practice outlined:
○ Any return can be enquired into
■ Both income tax and corporation tax returns are legally open to enquiry, whether by random selection or risk‑based targeting.
■ A formal enquiry notice must be issued within the enquiry window (normally 12 months from filing, with special rules for late or amended returns).
○ Most enquiries are risk‑driven, not purely random
■ HMRC still conducts a small number of random enquiries, but the dominant model is risk‑assessment based on the contents of returns and information from third parties.
○ Key risk factors include:
■ figures in the return that appear inconsistent, incomplete, or unusual relative to previous years or to third‑party data;
■ late filing or frequent/amended returns, which extend enquiry windows and may indicate poor compliance;
■ large or unusual repayment claims or under‑payments/instalments that appear inconsistent with what the taxpayer “must have known” about their liability, especially for large companies;
■ external information suggesting undeclared income or exaggerated reliefs, including card turnover or bank data inconsistent with declared sales or incmation from other HMRC teams (for example, VAT investigations);
■ a history of non‑compliance, penalties, or poor co‑operation in previous dealings with HMRC, which will push a taxpayer higher up the risk scale.
○ Compliance checks can begin even before you file
■ HMRC can look at documents and inspect premises before a return is filed if it sees a reason, particularly in businesses or sectors it considers risky; those checks may then lead into a formal enquiry once the return is submitted.
○ Third‑party data is central
■ HMRC’s powers to obtain information from banks, payment processors, online platforms and others allow it to compare your returns with external data; significant mismatches are classic triggers for deeper compliance checks or enquiries.
In short, while HMRC retains the power to open an enquiry at random, the main real‑world triggers are:
○ identified inconsistencies or unusual items in your returns;
○ discrepancies between your returns and third‑party data;
○ patterns of late or amended filings or problematic payment behaviour; and
○ any tax risk signals emerging from other parts of HMRC or from previous compliance history.
If you want to minimise the risk of an enquiry, the law and practice suggest focusing on accurate, well‑explained returns, timely filing and payment, and ready co‑operation with reasonable information requests.
Jiten Shah
YTS Accounting