...
HMRC compliance check - don't be scared
HMRC Compliance Check 2025: How to Prepare for an Inspection
2 October 2025

Quick Answer: An HMRC compliance check in 2025 doesn’t have to be a nightmare. If you keep your records regularly, save all invoices, and get expert help in time, you can face the inspection with confidence. HMRC mainly checks businesses where they spot irregularities, but with proper documentation, every problem is avoidable.


What You’ll Find in This Article

  • Why HMRC selects you for a compliance check (and how to avoid it)
  • Concrete steps for preparation with practical examples
  • The most common mistakes small businesses make
  • Real case study from a London restaurant
  • Your accountant’s role in HMRC compliance checks
  • Your rights and options during HMRC inspections
  • Complete documentation checklist

Search Intent: This article serves both informational and practical purposes. If you’ve already received notice from HMRC (transactional intent) or just want to prepare for a possible future inspection (informational intent), you’ll find everything you need here.

👉 Request a free consultation now before it’s too late!


What Is an HMRC Compliance Check and Why Does It Matter in 2025?

Let’s be honest: nobody’s pleased when HMRC decides to inspect their business. But you know what? An HMRC compliance check doesn’t necessarily mean there’s a problem.

I remember when a colleague first heard about the inspection. They nearly had a panic attack. Yet the outcome? No issues at all, just a routine check, and it was closed within three weeks. Why? Because all documents were in order.

HMRC (Her Majesty’s Revenue and Customs) is the UK’s tax and customs authority. An HMRC compliance check is a process where the tax authority examines whether you’ve submitted your returns correctly and paid the appropriate amount of tax.

Three main reasons why inspections have increased in 2025:

  • Digital economy expansion: With the growth of online sales, HMRC uses more sophisticated software to detect irregularities
  • Post-Brexit regulatory rigour: New trade relations mean increased attention to import-export transactions
  • Revenue enhancement: According to the 2024-25 HMRC Annual Report, the tax authority plans more inspections, recruiting 5,500 new compliance officers

Who Gets Selected for Compliance Checks?

HMRC doesn’t choose randomly. They have a sophisticated risk assessment system that rates certain businesses as “higher risk”.

Psst, insider tip: If your revenue suddenly jumps or drops by more than 20% in a year without a clear explanation, that’s a red flag. The same applies if you report unusually high expenses or submit returns irregularly.


The Most Common Mistakes That Lead to HMRC Compliance Checks

1. Missing or Disorganised Invoices

You know the difference between a peaceful night and a sleepless weekend? Whether you can find last year’s invoice from 17 March when HMRC asks for it.

A Manchester construction small business owner told me: “I thought it was enough if my bank statements were in order. Then the inspection came, and I couldn’t find a dozen invoices. Fine: £2,400.”

Common documentation errors:

  • Mixing personal and business expenses (this is the most common!)
  • Undocumented cash transactions
  • Missing VAT invoices for larger purchases
  • Incorrect or incomplete mileage records
  • Missing rental agreements or service contracts

2. Cash-Based Business Pitfalls

If you’re in hospitality or retail, this is for you. Cash transactions always get extra attention from HMRC.

What does HMRC expect from cash-based businesses?

  • Daily till closures documented
  • Z-reports (till reports) retained
  • Cash movement diary maintained
  • Bank deposits matching revenue

A London restaurant owner put it this way: “I thought if 80% of my revenue was cash, I’d pay less tax. I was wrong. HMRC compared our purchases with declared revenue, and the maths didn’t add up. £18,000 fine plus 3 years’ backdated tax.”

3. Misunderstood Tax Reliefs

HMRC doesn’t mind if you claim every legitimate relief. But there’s a thin line between legitimate relief and creative accounting.

Commonly misunderstood areas:

  • Home office expenses: You can’t deduct the entire mortgage payment, only the proportionate share
  • Company car: For personal use, you must document business journeys in detail
  • Meal expenses: Only deductible if it was specifically a business meeting
  • Training costs: Only courses directly related to your current activity

Step by Step: Preparing for an HMRC Compliance Check

Step 1: The Notice Arrives

When you receive the HMRC letter, stay calm. You typically get 2-4 weeks’ preparation time. The letter tells you exactly what they want to see and when.

Don’t let panic take over. I remember a client who wanted to sell their business immediately when they got the notice. Two months later, it turned out to be just a routine VAT check, nothing more serious.

Step 2: Gathering Documents

This stage determines the entire inspection outcome. Prepare a complete folder (both digitally and on paper) with the following documents:

Essential documents (mandatory):

  • Purchase invoices (everything over £25)
  • Sales invoices (all customer invoices)
  • Bank statements (all business accounts)
  • VAT returns (last 6 years)
  • Annual accounts and tax returns
  • Payroll documents (if you have employees)
  • Contracts (rental, service, subcontractor)

Supplementary documents (extremely useful):

  • Business plan or strategy (explains revenue changes)
  • Domestic and international travel documentation
  • Securities and investment statements
  • Cashbook or other manual records

👉 Don’t know what to compile? Contact us!

Step 3: Involving Your Accountant (Critical!)

If you don’t have an accountant yet, you need to find one immediately. If you do, call them straight away.

Why is the accountant’s role crucial?

  • Knows tax law and HMRC procedures
  • Has experience with similar cases
  • Can mediate between you and HMRC
  • Recognises potentially problematic areas
  • Helps organise documents

A Birmingham freelance marketer reported: “When I got the notice, I had no accountant. I tried to handle it myself. After three meetings, it was such chaos they nearly started an influence investigation. Then I found an accountant who sorted it in two weeks.”

Step 4: Preparing for the Meeting

The HMRC inspector can examine in two ways: at their office or with an on-site visit. In both cases, prepare.

Meeting tips:

  • Arrive on time (at least 10 minutes early)
  • Bring your accountant
  • Be polite but don’t talk too much
  • Only answer what’s asked
  • If you don’t know something, don’t make up an answer – say you’ll check
  • Take notes (or have your accountant take notes)

What to expect from the HMRC inspector?

  • Professional behaviour (but don’t expect particular warmth)
  • Specific questions about finances
  • Possibly requests for additional documents
  • At least a 2-3 hour meeting (first time)

Real Case Study: London Restaurant Story

Background

Jane and Tom opened a small restaurant in East London in 2019. After COVID, in 2022, their turnover significantly increased, partly thanks to Uber Eats. In August 2024, they received the HMRC notice.

The Problem

HMRC investigated why revenue suddenly jumped 140% in the 2022-23 tax year whilst purchases only increased 60%.

What actually happened?

  • The restaurant switched to online orders, which came with lower ingredient costs (less waste)
  • New menu with higher margins
  • But: they didn’t document cash receipts properly and mixed personal and business expenses

The Solution

  1. Involving an accountant: They immediately hired an AWOC accountant who specialised in hospitality
  2. Organising documents: In 2 weeks they sorted all invoices and bank transactions
  3. Cash records: They retrospectively reconstructed daily till closures from Z-reports
  4. Strategy document: The accountant wrote a detailed business report explaining the revenue growth

The Outcome

HMRC acknowledged the business growth’s legitimacy. However, they found some administrative errors (missing invoices, incorrect dating), for which they imposed a £1,200 fine. But this was much better than the originally anticipated £12,000-15,000.

Lessons:

  • Timely professional help can change everything
  • Always document and explain growth
  • Cash receipts require particularly precise accounting

Documentation Checklist: What to Keep to Hand Always

Document Type Retention Period Format Priority
Invoices (purchase and sales) Ltd: 6 years / Sole trader: 5 years Digital + Paper ⭐⭐⭐⭐⭐
Bank statements Ltd: 6 years / Sole trader: 5 years Digital ⭐⭐⭐⭐⭐
VAT returns 6 years Digital ⭐⭐⭐⭐⭐
Payroll records 6 years Digital + Paper ⭐⭐⭐⭐
Contracts Valid period + 6 years Paper (original) ⭐⭐⭐⭐
Travel expenses Ltd: 6 years / Sole trader: 5 years Digital ⭐⭐⭐
Company car records Ltd: 6 years / Sole trader: 5 years Digital ⭐⭐⭐
Stock inventories 6 years Digital ⭐⭐⭐

Important: For limited companies, the mandatory retention period is 6 years, whilst for sole traders it’s 5 years (or minimum 22 months after submitting the return). If you submit your return late, this can increase even more!

Digitalisation tip: Use cloud storage (Google Drive, Dropbox) shared with your accountant. This way, you both have immediate access to documents when needed.


Your Rights and Options During HMRC Compliance Checks

What Are You Entitled To?

  1. Professional representation: You can request your accountant’s or solicitor’s presence at any time
  2. Request for time: If you’re not prepared, you can ask for a postponement (but max 1-2 weeks)
  3. Right to explanation: You can give an explanation for every irregularity
  4. Appeal: If you disagree with the inspector’s decision, appeal
  5. HMRC Charter protection: The tax authority must treat you respectfully and professionally

What Should You NEVER Do?

  • Don’t lie – This is the fastest route to criminal proceedings
  • Don’t hide documents – If it’s discovered you’re deliberately concealing something, that’s an aggravating circumstance
  • Don’t be aggressive – The inspector is just doing their job
  • Don’t try to “make a deal” – HMRC doesn’t work that way

Advantages and Disadvantages: Handling HMRC Inspection With Accountant vs Alone

Aspect With Accountant Alone
Expertise ✅ Experienced, knows HMRC procedure ❌ Learning whilst trying
Time ✅ Accountant does the heavy lifting ❌ You lose weeks on documentation
Stress level ✅ Low, someone’s dealing with it ❌ Very high, you bear it alone
Error risk ✅ Minimal, professional checks ❌ High probability of mistakes
Cost ❌ £500-2,000 (on average) ✅ No direct cost
Fine risk ✅ Much lower ❌ Higher, as greater chance of errors
HMRC communication ✅ Accountant mediates ❌ You speak directly with the inspector

Summary: Whilst an accountant represents a cost, in the long run it can be much cheaper than fines and wasted time. Remember, a good accountant isn’t an expense, it’s an investment.

👉 Request a quote for professional compliance check support!


FAQ: Frequently Asked Questions About HMRC Compliance Checks

1. How long does an average HMRC compliance check take?

Answer: A simple, well-documented small business inspection typically takes 4-8 weeks. If there are more complex or incomplete documents, this can stretch to 3-6 months. For more complex matters, the average duration can be 12-18 months.

2. Will I get fined if they find a mistake?

Answer: Not automatically. If the error was an honest mistake (e.g., you miscalculated something), you might just have to pay the missing tax with interest. However, if HMRC sees deliberate tax evasion, fines can range from £300 to even 100% of the amount owed.

3. What if I can’t find all the invoices?

Answer: Don’t panic. Try to reconstruct from bank statements. In most cases, suppliers can resend copies. If a document absolutely can’t be found, be honest with HMRC and explain the situation. Good faith effort counts for a lot.

4. How often does HMRC inspect?

Answer: HMRC doesn’t publish how many businesses they randomly inspect annually. Most inspections are targeted when the tax authority detects irregularities in returns or data. In 2024-25, they conducted 316,000 compliance checks in total across all taxpayer types. The risk depends on your industry, turnover size, and how consistent your returns are.


2025 Changes and New Rules

MTD (Making Tax Digital) Extension

Making Tax Digital for VAT has been mandatory for all VAT-registered businesses since 2022. The next big change: from April 2026, MTD for Income Tax begins for those earning £50,000+ revenue. This means:

  • Digital bookkeeping mandatory (paper-based no longer acceptable)
  • MTD-compatible software use mandatory
  • Quarterly digital returns

How does this affect you? If you’re still keeping paper records and have reached the £50,000 revenue threshold, you must switch to digital by 2026. HMRC will more closely inspect those who don’t meet the new requirements.

Stricter Cryptocurrency Scrutiny

In 2025, HMRC is paying particular attention to cryptocurrency transactions. If you trade bitcoin, ethereum, or other crypto assets, you must document every transaction.

New requirements:

  • Date and exchange rate of every purchase and sale
  • Wallet addresses and platforms
  • Profit/loss calculation for every sale

Remote Working Rules

Since COVID, many businesses have switched entirely to remote work. HMRC is now examining whether you’re genuinely using a home office for business purposes if you’re claiming reliefs.


Infographic Suggestion: “The 7 Stages of HMRC Compliance Check”

Suggested visual elements:

  1. Notice arrives – Icon: envelope with red seal
  2. Gathering documents – Icon: folders and files
  3. Involving accountant – Icon: businessman with phone
  4. Organising documents – Icon: organised spreadsheet
  5. Meeting with HMRC inspector – Icon: meeting table
  6. Request for additional information – Icon: document with magnifying glass
  7. Outcome – Icon: ticked document or warning sign

Image prompt: “High-resolution infographic showing 7 steps of HMRC compliance check process, with clear icons and minimalist design, professional business colours (blue and grey), detailed workflow chart, ultra detailed, modern flat design style”


Key Takeaways: What You Must Remember

HMRC compliance checks aren’t the end of the world – most cases close smoothly with proper documentation

Regular bookkeeping is key – reconcile monthly with your accountant, don’t pile it up until year-end

Document retention mandatory for 6 years – both digitally and on paper (if possible)

Involving an accountant is worth more than its cost – professional help can reduce fines and stress

Honesty always pays off – if you’ve made a mistake, better admit it than conceal it

Prepare now – don’t wait until you receive the notice


Conclusion: You’re in Control of the Situation

An HMRC compliance check doesn’t have to be a catastrophe. By reading this article, you’re already ahead of most small businesses in the United Kingdom.

I remember when I first encountered this topic. I felt it was too complicated, too many rules, too much risk. But then I realised: if I proceed step by step, if I don’t let documentation pile up, and if I ask for help in time, everything’s manageable.

The biggest mistake you can make is postponing everything. “I’ll deal with it later.” “I’ll sort it out at year-end.” Don’t! Keep your books in order monthly.

And if you feel it’s too much for you alone – and honestly, it is for many business owners – find a professional. Don’t be ashamed. The most successful business people don’t do everything alone either.

What should you do now, concretely?

  1. Review the documentation checklist and check what you have to hand
  2. If you don’t have an accountant, find one this week
  3. Set up a monthly appointment for financial review
  4. If you’ve already received an HMRC notice, don’t delay – contact a professional immediately

👉 Book a free consultation with AWOC and rest assured everything’s in order!


Sources and Further Reading

  1. HMRC Annual Report and Accounts 2024-25 – Her Majesty’s Revenue and Customs (2025). Available: https://www.gov.uk/government/publications/hmrc-annual-report-and-accounts-2024-to-2025
  2. HMRC’s Annual Report and Accounts 2024-25: Executive Summary – GOV.UK (2025). Available: https://www.gov.uk/government/publications/hmrc-annual-report-and-accounts-2024-to-2025/hmrcs-annual-report-and-accounts-2024-to-2025-executive-summary
  3. HMRC’s Annual Report and Accounts 2024-25: Chief Executive’s Performance Report – GOV.UK (2025). Available: https://www.gov.uk/government/publications/hmrc-annual-report-and-accounts-2024-to-2025/hmrcs-annual-report-and-accounts-2024-to-2025-chief-executives-performance-report
  4. Self Assessment Tax Returns: Penalties – GOV.UK (2024). Available: https://www.gov.uk/self-assessment-tax-returns/penalties
  5. Keeping Your Pay and Tax Records: How Long to Keep Records – GOV.UK (2015). Available: https://www.gov.uk/keeping-your-pay-tax-records/how-long-to-keep-your-records
  6. Find Out If and When You Need to Use Making Tax Digital for Income Tax – GOV.UK (2021). Available: https://www.gov.uk/guidance/check-if-youre-eligible-for-making-tax-digital-for-income-tax
  7. One Year Until Making Tax Digital for Income Tax Launches – GOV.UK (2025). Available: https://www.gov.uk/government/news/one-year-until-making-tax-digital-for-income-tax-launches
  8. Small Firms Spend £25bn on Tax Compliance as HMRC Slammed – City AM (2025). Available: https://www.cityam.com/small-firms-splash-out-25bn-on-tax-compliance-as-hmrc-accused-of-poor-service/
  9. HMRC Compliance Checks: Help and Support – GOV.UK (2023). Available: https://www.gov.uk/guidance/hmrc-compliance-checks-help-and-support
  10. HMRC Records Management and Retention Policy – GOV.UK (2016). Available: https://www.gov.uk/government/publications/hmrc-records-management-and-retention-and-disposal-policy/records-management-and-retention-and-disposal-policy
Seraphinite AcceleratorOptimized by Seraphinite Accelerator
Turns on site high speed to be attractive for people and search engines.