An HMRC audit can be daunting, but understanding what triggers them can help you avoid unnecessary scrutiny. In this guide, we explain the red flags that increase the risk of an audit, how to ensure your records are in order, and what steps to take if you receive an inquiry from HMRC.
Surviving an HMRC Audit: What Triggers Investigations and How to Prepare
Most people don’t think about HMRC until they get that dreaded letter. And by then, it’s too late. You’re either ready, or you’re scrambling.
So let’s talk about it. Why does HMRC investigate businesses? How do you avoid it? And if you do get audited, how do you handle it like a pro?
Why HMRC Might Be Watching You
HMRC doesn’t waste time. They look for patterns. Red flags. Anything that screams “something’s not right.” Here’s what puts you on their radar:
- Your numbers don’t add up – If your income jumps up and down without reason, they’ll notice. If your expenses look suspicious, they’ll notice. If your profit margins are way off for your industry, guess what? They’ll notice.
- Too much cash, not enough explanation – Cash-based businesses (hospitality, construction, etc.) get extra attention. If you’re depositing large sums of cash without clear records, you might as well wave a red flag at HMRC.
- You keep filing late, or with mistakes – Late filings, incorrect Returns, or wildly changing figures year after year? That’s like sending an invitation for an audit.
- Your business and personal finances are all mixed up – If you’re running business expenses through a personal account (or vice versa), expect questions.
- You’re in a “risky” industry – Some industries naturally get more scrutiny. If your business handles a lot of cash or has high write-offs, HMRC is watching more closely.
- Someone reports you – Yes, this happens. Employees, ex-business partners, even competitors can tip off HMRC if they think something is shady.
- You just got unlucky – Sometimes, audits are random. You can’t control this. But you can control how prepared you are.
How to Stay Off HMRC’s Radar (And Be Audit-Ready)
You don’t want an audit. But if it happens, you don’t want to panic. The best way to survive? Be so prepared that it doesn’t matter. Here’s how:
1. Track Everything (Like Your Business Depends On It – Because It Does)
- Keep detailed records: invoices, receipts, payroll, bank statements – all of it.
- Store them securely. HMRC can ask for records up to six years back. You don’t want to be hunting for old receipts.
- Use accounting software. It keeps everything clean and reduces mistakes. Messy books scream “audit me.”
2. File Like a Pro
- Submit Returns on time – late filings = unnecessary attention.
- Be accurate. Guesswork gets you audited.
- Hire an Accountant if you’re not 100% sure what you’re doing. (Trust me, it’s cheaper than an HMRC investigation.)
3. Separate Business and Personal Finances
- One bank account for business. One for personal. No exceptions.
- Paying for something business-related? Use the business account.
- Want to take money out? Pay yourself properly, don’t just dip in.
4. VAT and PAYE – Do It Right
- If you’re VAT registered, make sure your Returns match your books.
- PAYE? Make sure you’re paying the right amounts for employees.
- Get it wrong? HMRC will notice.
5. If You Get That Letter, Don’t Panic
- Step 1: Read it carefully. What are they asking for?
- Step 2: Call your Accountant. (If you don’t have one, now’s the time.)
- Step 3: Get your documents in order. Make sure they match your Returns.
- Step 4: Be honest. If you made mistakes, own up. HMRC is way tougher on people who try to cover things up.
- Step 5: Know your rights. You can challenge findings and negotiate if needed.
Final Thought: Stay Ready So You Don’t Have to Get Ready
Look, you can’t always avoid an HMRC audit. But you can be so prepared that it doesn’t matter. Keep clean records. File on time. Separate business and personal finances. Do things right from day one, and even if you get audited, it’ll be just another day at the office.
Need help making sure your finances are audit-proof? Grace Certified Accountants has your back. Let’s get your business locked in and stress-free.