What happens if HMRC investigates my limited company?
Direct Answer
If HMRC opens an enquiry into your limited company, they will issue a formal notice under Section 9A TMA 1970 (personal tax) or Paragraph 24 Schedule 18 FA 1998 (corporation tax). They can request any business records going back up to 6 years (20 years if fraud is suspected). Most enquiries are resolved within 3–18 months. Having complete, organised records and a qualified accountant representing you are the two most important factors in a successful outcome. The vast majority of contractor enquiries close with little or no additional tax due.
The three types of HMRC enquiry
Aspect enquiry
HMRC questions one specific aspect of your return — a single expense claim, dividend timing, or a deduction they want to understand. Usually resolved quickly with documentation.
Full enquiry
HMRC examines your entire tax return — every income source, every expense, every deduction. Triggered by inconsistencies, significant year-on-year changes, or random selection. Can take 12–24 months. Requires thorough record-keeping going back several years.
IR35 status investigation
HMRC specifically investigates whether your working arrangements should have been inside IR35. Can result in significant backdated tax liabilities plus interest and penalties. HMRC's IR35 compliance team focuses heavily on technology, financial services, and public sector industries.
What triggers an HMRC enquiry?
HMRC uses a risk-scoring system called CONNECT — a data-matching system that cross-references information from banks, Companies House, Land Registry, DVLA, and overseas tax authorities.
Financial triggers
Large unexplained expenses relative to turnover
Consistent losses year after year
Variance from industry benchmarks
High Director's Loan Account balances
VAT returns inconsistent with CT returns
Behavioural triggers
Late filing of returns or accounts
Amendments to filed returns
Tip-offs from third parties
Random enquiry (HMRC selects a percentage randomly regardless of risk)
IR35-specific triggers
Long-term engagement with a single client
Contract patterns resembling employment
Former-employer clients
Industries HMRC is actively targeting
What HMRC can ask for
Under an enquiry, HMRC can formally request any of the following:
Business bank statements (all accounts)
Sales invoices and contracts
Purchase invoices and receipts
Payroll records and RTI submissions
Board minutes and dividend vouchers
Director's Loan Account records
Correspondence with clients (for IR35)
Personal bank statements (if undisclosed income suspected)
Time limits for HMRC to open an enquiry
| Situation | HMRC time limit |
|---|---|
| Standard (reasonable care taken) | 12 months from filing deadline |
| Careless error | 4 years from end of relevant tax year |
| Deliberate error | 6 years from end of relevant tax year |
| Fraud | 20 years — effectively no limit |
The enquiry process — step by step
Opening letter
HMRC sends a formal written notice stating they are opening an enquiry and what they want to examine. You have no option to refuse — the enquiry is a legal right.
Information request
HMRC issues a Schedule 36 information notice listing exactly what documents they require. Deadline is usually 30 days but can be extended.
Review and response
Your accountant compiles the requested information and responds. A competent accountant manages all communication — you should not correspond with HMRC directly during an enquiry.
HMRC's conclusion
HMRC either: (a) closes the enquiry with no additional tax due, (b) agrees an additional tax liability with interest, or (c) issues a discovery assessment if they believe income was hidden.
Appeal (if needed)
If you disagree with HMRC's conclusion, you can appeal to the First-tier Tribunal. Many cases settle at this stage or before — HMRC does not win every case it pursues.
Penalties — what you could owe
If HMRC finds an underpayment, penalties are charged on top of the tax owed plus interest (currently ~7.25% — check current rate).
| Behaviour | Penalty range |
|---|---|
| Reasonable care taken, honest error | No penalty (just tax + interest) |
| Careless error | 0–30% of unpaid tax |
| Deliberate error (not concealed) | 20–70% of unpaid tax |
| Deliberate and concealed | 30–100% of unpaid tax |
Disclosing promptly and cooperating fully significantly reduces penalties within each band.
IR35 investigation — the worst-case scenario
If HMRC determines your contract was inside IR35, they calculate the "deemed payment" — what your income would have been as an employee — and assess income tax and NI (employer and employee) on this amount. An investigation can cover multiple tax years simultaneously.
Worst-case example: 3 years of IR35 non-compliance at £80,000/year
Additional tax and NI (3 years): ~£50,000–£65,000
Interest on late payments: Several thousand
Penalties (careless — up to 30%): ~£20,000
Total potential exposure: £75,000+
This is why IR35 insurance exists — several contractor accountancy firms include it in their package.
How to protect yourself
Record-keeping
Keep all business bank statements for at least 6 years
Store all invoices and receipts digitally (HMRC accepts digital records)
Maintain board minutes and dividend vouchers for every dividend declared
Keep contracts and working arrangement documentation
IR35 protection
Get a written IR35 contract review for every new contract
Keep evidence of substitution rights, working practices, and financial risk
Do not work exclusively with one client for extended periods without IR35 review
Consider IR35 insurance (available through specialist contractor accountants)
On receiving an HMRC letter — do this immediately
Do not ignore it — deadlines are real and missing them makes things worse
Do not contact HMRC directly before speaking to your accountant
Do not destroy or alter any records
Contact your accountant immediately — same day if possible
Fee protection insurance covers the cost of your accountant's time during an enquiry (otherwise billed at £150–£350/hour). It costs approximately £100–£200/year and is worth having. Several specialist contractor accountants include it in their monthly fee.
How long does an investigation take?
| Enquiry type | Typical duration |
|---|---|
| Aspect enquiry (single issue) | 3–6 months |
| Full enquiry (well-organised records) | 6–12 months |
| Full enquiry (poor records) | 12–24 months |
| IR35 investigation | 12–36 months |
| Tribunal appeal | Add 12–18 months |
Fee protection insurance covers your accountant's cost during an HMRC investigation.
Autobooks includes fee protection insurance for all clients — so you're covered if HMRC comes knocking. From £89+VAT/month.