HMRC tax investigations, what the figures mean for small businesses
Overview
HMRC’s compliance work produces substantial financial returns, but headline figures need careful interpretation. Analysis by Pinsent Masons, reported by Money Marketing and Tax Journal, put the average return across five key taxpayer directorates at £34.70 for every £1 spent on investigations in 2024/25, compared with £30.80 the previous year, an increase of approximately 13%.
The same analysis reported a return of £14.59 per £1 for individuals and small businesses, up from £11.95, an increase of approximately 22%. These figures provide context, not a prediction of what an individual enquiry will recover or how likely a particular business is to be checked.
Separately, HMRC’s Measuring tax gaps 2026 edition gives a provisional estimate of £59.2 billion for the 2024/25 tax gap, equivalent to 6.4% of total theoretical tax liabilities. Small businesses account for the largest share, estimated at 62%. These are statistical estimates, subject to uncertainty and revision, not allegations against individual businesses.
The practical message is straightforward: keep accurate records, reconcile income from every channel and get advice promptly if HMRC contacts you. Tax investigation insurance may help with eligible professional fees, but only where the policy covers the case.
1. Detailed Content
What the investigation-return figures actually mean
The £34.70 and £14.59 figures come from reported analysis of compliance performance. They should not be described as the return on every HMRC enquiry or as HMRC’s overall return on its entire operating budget.
HMRC’s wider measure of “compliance yield” includes more than money collected immediately. It can include additional tax expected, revenue losses prevented and estimated effects on future compliance. For that reason, a headline return should not be presented as a simple cash profit from investigations.
The reported rises demonstrate the importance of compliance activity, but do not establish that all five directorates improved or that every small business faces an investigation.
Understanding the tax gap
The tax gap is the difference between the tax HMRC estimates should be paid and the amount actually paid. It includes different causes, such as errors, failure to take reasonable care, non-payment, avoidance and evasion.
HMRC’s provisional 2024/25 estimate is £59.2 billion, or 6.4% of theoretical tax liabilities. The small-business share is estimated at 62% of the gap. This does not mean that 62% of small businesses are non-compliant, or that small businesses underpay 62% of their tax.
AI, data matching and risk assessment
HMRC uses data analysis and matching to identify possible tax risks. Its 2024/25 annual report also describes advanced AI analytics supporting compliance targeting, debt prediction and fraud detection.
Depending on the tax and HMRC’s lawful access to information, checks may involve comparing returns with payroll information, other tax returns, financial records, payment-provider information, property records or other third-party material. This does not mean that HMRC has unrestricted, live access to every bank account or that AI alone decides whether someone has underpaid tax.
HMRC also uses random enquiries for some purposes. Reliable records remain important even where there is no obvious inconsistency.
Matters worth reviewing in your own records
The following are practical checks, not an official or exhaustive list of HMRC investigation triggers:
Cash takings that do not reconcile with sales records.
Unexplained differences between bank deposits, accounts and tax returns.
Card settlements or online-platform receipts that do not reconcile with recorded sales.
Significant expenditure or asset purchases without a clear, documented funding source.
Late or missing returns, or repeated corrections without a clear explanation.
Unexplained movements in margins, turnover or losses.
Differences can have legitimate explanations. Bank receipts may include loans or transfers, while card settlements may be net of fees and refunds. Taxable turnover can also differ from cash received because of accounting treatment and timing. Keep reconciliations rather than assuming every mismatch is undeclared income.
What happens during a compliance check?
HMRC will normally contact you or your adviser to explain what it wants to check. It may request accounts, tax calculations, invoices, receipts, bank statements, payroll records or explanations of particular transactions. Some checks are narrow; others cover several issues or periods.
Read the correspondence carefully and establish whether it is an informal request or a formal notice. The scope, legal obligations, time limits and any appeal rights depend on the document and circumstances. Ask your adviser to review these rather than assuming every request has the same legal effect.
Provide accurate, complete information relevant to the request. Explain genuine uncertainty and missing records. Request extra time before a deadline expires if necessary, but do not assume an extension has been granted. Additional tax, interest or penalties may follow if HMRC finds an underpayment; there may also be review or appeal rights.
Serious cases, COP8 and COP9
Code of Practice 8 explains certain civil investigations conducted by HMRC’s Fraud Investigation Service where COP9 is not used. These can involve a suspected significant loss of tax, including arrangements intended to reduce a liability. The approach can change if HMRC suspects or finds evidence of fraud.
Code of Practice 9 applies where HMRC suspects tax fraud and offers the Contractual Disclosure Facility. The facility requires an admission of deliberate behaviour causing a tax loss and full disclosure under its terms. It is not the route for ordinary mistakes unrelated to fraud. HMRC’s offer normally gives 60 calendar days to respond.
Both processes require specialist advice. Do not make an admission, reject an offer or submit an incomplete disclosure without understanding the consequences. Preserve records and be truthful. Any protection against criminal investigation under the Contractual Disclosure Facility is subject to its terms and the behaviour disclosed, not blanket immunity.
Good bookkeeping helps you answer questions
Useful controls include regular bank reconciliations, complete sales records, separate business and personal spending, matching payment-provider settlements to underlying sales, and documenting unusual transactions.
Keep records for the period required for the relevant tax and business type. Longer retention may be needed where a return is late or a check remains open. Preserve relevant existing records during a check rather than deleting them merely because their normal retention period has expired.
Good bookkeeping helps you explain your position. It does not guarantee that HMRC will not contact you or that no tax adjustment will be needed.
Tax investigation insurance
Insurance may help meet professional fees incurred in responding to a covered enquiry. Check the taxes and types of enquiry covered, exclusions, excesses, notification deadlines, adviser restrictions and whether costs require advance approval.
Do not assume an existing enquiry or a COP8/COP9 case will be covered. Fee-protection cover does not normally pay the underlying tax, interest or penalties. Check the actual policy wording before relying on it or instructing work you expect the insurer to fund.
Step By Step Procedure
Check your records. Bring bookkeeping up to date, reconcile bank and payment-provider accounts, and investigate missing documents or suspense balances.
Reconcile every income channel. Compare invoices, cash takings, till records, card payments and online-platform sales. Explain fees, refunds, transfers and timing differences.
Review before filing. Check tax returns against the accounts and supporting schedules. Correct errors through the appropriate process and retain an audit trail.
Organise your evidence. Keep returns, accounts, invoices, contracts, payroll records and supporting calculations accessible and backed up.
Act promptly on HMRC contact. Save the letter, note deadlines, verify the contact if necessary and tell your accountant or tax adviser.
Check the request and respond properly. Review its scope and your rights, provide an indexed response, and explain gaps honestly. Never falsify, backdate or destroy evidence.
Notify any insurer promptly. Check cover and obtain any required approval before incurring fees. Do not let an insurance query cause you to miss an HMRC deadline.
Resolve and improve. Review any findings, tax adjustments and appeal options with your adviser, then update your processes to prevent recurring errors.
Frequently Asked Questions
Does £34.70 for every £1 mean HMRC will investigate every small business?
No. It is a reported average across five directorates, not a quota or a likelihood of investigation. HMRC carries out risk-based checks and some random enquiries. Accurate records help you respond, but do not prevent every check.
Why is the individuals-and-small-business figure £14.59 rather than £34.70?
It relates to a particular taxpayer group, whereas £34.70 is the reported average across five directorates. Different populations, case types and costs produce different results. Neither figure predicts the outcome of your case.
Is the £59.2 billion tax gap a confirmed loss caused by small businesses?
No. It is HMRC’s provisional estimate across the tax system for 2024/25 and includes several causes. Small businesses account for an estimated 62% share, but the figures are subject to uncertainty and revision.
Does a mismatch mean I have done something wrong?
Not necessarily. Loans, transfers, refunds, payment-provider fees and accounting timing can all explain differences. Keep evidence that shows how the records reconcile.
What should I do if HMRC requests information?
Tell your adviser promptly, check the deadline and identify what has been requested. Review formal-notice obligations and any available challenge or appeal rights. Provide accurate information and ask for extra time where genuinely needed.
What is the difference between a compliance check and an investigation?
A compliance check is HMRC’s broad term for checking whether tax affairs are correct. “Investigation” is often used for more detailed work. The actual process and powers depend on the notice, tax and circumstances, not simply the label.
What should I do if I receive a COP8 or COP9 letter?
Obtain specialist tax-disputes advice immediately, preserve records and note all deadlines. COP9 involves suspected fraud and a potentially significant admission under the Contractual Disclosure Facility, so it should not be treated as a routine bookkeeping query.
Is tax investigation insurance worthwhile?
It may help manage eligible professional-fee costs, but suitability and cover depend on the policy and your circumstances. Check the wording and notification rules. Insurance does not replace good records or remove tax liabilities.