assuming they are in serious trouble. However, not all HMRC enquiries are the same. Understanding the difference between an HMRC compliance check and a tax investigation can help you respond appropriately, avoid unnecessary stress, and protect your business.
In this comprehensive guide, we will explain:
- What an HMRC compliance check is
- What a tax investigation is
- The key differences between the two
- What triggers each type of enquiry
- What HMRC will ask for
- Possible outcomes and penalties
- How to prepare and respond correctly
- How The Infinity Group can help you stay compliant and avoid issues
This blog is written for UK businesses, contractors, and payroll professionals who want clarity and confidence when dealing with HMRC.
What Is an HMRC Compliance Check?
An HMRC compliance check is a routine review to ensure that your tax returns are accurate and that you are following the rules.
HMRC uses compliance checks as part of their normal monitoring process.
The main objectives are to:
- Correct mistakes
- Prevent future errors
- Educate businesses on tax obligations
- Ensure the right amount of tax is being paid
Important: A compliance check does not necessarily mean HMRC suspects wrongdoing. It may be random or triggered by a minor discrepancy.
Types of compliance checks:
- Income tax and corporation tax returns
- VAT returns
- PAYE and payroll records
- CIS deductions
- Expenses and records
Often, compliance checks start with a letter requesting additional information or clarification.
What Is an HMRC Tax Investigation?
A tax investigation, on the other hand, is much more serious. It happens when HMRC believes there may be deliberate tax evasion, underpayment, or fraud.
A tax investigation usually means that HMRC:
- Has identified potential non-compliance
- Is deeply reviewing previous years of returns
- Will examine all financial records in detail
- May interview business owners or staff
Tax investigations can be stressful, time-consuming, and potentially expensive, as they often lead to penalties, interest charges, and in severe cases, legal action.
Key Differences: Compliance Check vs Tax Investigation
Feature | Compliance Check | Tax Investigation |
Purpose | Routine review or clarification | Suspected serious non-compliance or fraud |
Tone | Informal or educational | Formal and detailed |
Scope | Specific area (e.g., payroll, VAT) | Whole business or multiple years |
Impact | Usually minor | Can lead to large tax bills and penalties |
Duration | Short-term | Can last months or even years |
Severity | Low to medium | Medium to high |
Legal consequences | Rare | Possible |
Understanding these differences helps you stay calm and respond appropriately.
Why HMRC Starts a Compliance Check
Common triggers include:
- Errors or inconsistencies in tax returns
- Late tax submissions
- Large changes in figures year-to-year
- Random selection
- Industry-specific checks (e.g., construction, hospitality)
Sometimes HMRC simply wants clarification. For example, they may notice a sudden increase in expenses or drop in revenue.
Why HMRC Starts a Tax Investigation
Tax investigations are more targeted. They may occur due to:
- Repeated non-compliance
- Anonymous tip-offs
- Mismatched data (cross-checked with banks, payroll, RTI, CIS)
- Suspicious behaviour (e.g., cash-only business)
- Failure to respond to previous compliance checks
- High-risk industries (construction, retail, contractors, restaurants)
In some cases, HMRC uses its “Connect” software to identify unusual activity or discrepancies between data sources.
Types of HMRC Investigations
HMRC carries out investigations at different levels depending on the situation:
- Aspect Enquiry
Focuses on a specific part of your tax return, such as expenses or payroll.
This is the least serious form of investigation.
- Full Enquiry
HMRC reviews the entire tax return and all financial records.
Used when HMRC believes there may be significant errors or underpayment.
- Criminal Investigation
Rare but severe. HMRC suspects intentional fraud or evasion.
Could lead to prosecution and criminal charges.
What HMRC May Ask for During a Compliance Check
- Business accounts
- Receipts and invoices
- Bank statements
- Payroll and PAYE records
- CIS statements
- VAT returns
- Employee records
- Explanation of certain figures
In many cases, you can send documents online or by post. Sometimes HMRC may ask to visit your premises.
What HMRC May Ask for During a Tax Investigation
Tax investigations are far more extensive and may include:
- All business and personal bank accounts
- Contracts and agreements
- Emails and communication records
- Cashbook and petty cash records
- Interviews with directors or employees
- Historical records (up to 20 years in serious cases)
- Lifestyle reviews (to compare income vs spending)
HMRC looks for signs of deliberate concealment or fraud.
Outcomes of a Compliance Check
A compliance check can have several outcomes:
No changes – your records are correct
Minor adjustment – HMRC corrects a mistake
Guidance – HMRC advises on future compliance
Penalty – if mistakes were careless or repeated
Most compliance checks are resolved quickly and with minimal disruption.
Outcomes of a Tax Investigation
Tax investigations can result in:
Backdated tax payment (often over several years)
Interest charges
Penalties up to 100% of unpaid tax (or 200% for offshore cases)
Criminal prosecution in extreme cases
Damage to reputation and business relationships
Investigations can also take months or years to complete.
How to Respond to a Compliance Check
- Do not ignore the letter
Respond on time or request an extension. - Stay calm
It may be routine or minor. - Provide clear and honest information
- Keep copies of everything you send
- Seek professional advice if unsure
How to Respond to a Tax Investigation
- Get professional help immediately
Tax specialists or accountants can negotiate with HMRC on your behalf. - Do not destroy or hide documents
This can lead to criminal charges. - Be honest and cooperative
HMRC may reduce penalties if you are transparent. - Prepare for in-depth questioning
- Maintain records of all correspondence
How to Prevent Compliance Checks and Investigations
While it is impossible to avoid HMRC entirely, you can reduce the chances of being targeted by:
Filing returns accurately and on time
Keeping all financial records organised
Using compliant payroll and CIS systems
Avoiding large unexplained changes in figures
Staying up-to-date with HMRC legislation
Working with professional payroll and accounting providers
Responding quickly to HMRC requests
Conducting internal audits regularly
How The Infinity Group Helps Businesses Stay HMRC Compliant
The Infinity Group is a trusted UK payroll and compliance provider specialising in CIS payroll, construction payroll, umbrella payroll, and IR35 compliance.
Here is how The Infinity Group supports businesses:
Accurate payroll processing
HMRC-compliant CIS deductions and reporting
RTI submissions on time
IR35 contract reviews and assessments
Auto-enrolment and pension compliance
Record-keeping and documentation support
Help preparing for HMRC compliance checks
Ongoing advice and monitoring to prevent issues
By partnering with The Infinity Group, businesses can reduce risk, maintain accurate records, and avoid costly HMRC enquiries and penalties.
Compliance Check vs Investigation: In Summary
Feature | Compliance Check | Tax Investigation |
Routine or targeted | Often routine | Targeted and serious |
Level of scrutiny | Limited | Extensive |
Focus | Specific area | Entire tax affairs |
Trigger | Minor errors, random selection | Suspected fraud or major discrepancies |
Duration | Short | Long |
Penalties | Possible but lower | High, including prosecution |
Stress level | Low to moderate | High |
Final Thoughts
Receiving an HMRC compliance check is not the same as facing a tax investigation. One is often routine and manageable; the other can be serious and costly. The key is to understand the difference, respond correctly, and maintain excellent compliance practices.
The best defence is preparation.
By keeping accurate records, following HMRC rules, and working with trusted payroll and compliance experts like The Infinity Group, you can protect your business and operate with confidence.
