The HMRC compliance check that started with one question

The letter does not look like anything. It is one page, it uses the phrase "compliance check", and it asks about a single figure in a single return. Most owners read it twice, feel their stomach drop, and then reassure themselves that it is only one number.

It is almost never only one number. Not because HMRC is fishing, but because the answer to the first question is usually a document, and the document raises the second question, and by the time you have answered that you are four months in and have discovered how your own bookkeeping actually works.

The account below is composite and the figures are illustrative. The sequence is the part worth knowing, because it repeats.

What actually arrives

A compliance check is HMRC verifying that something declared is correct. It can be triggered by risk profiling, by a figure that sits oddly against similar businesses, by a large or unusual claim, by third-party data, or by nothing at all — a proportion are genuinely random.

The opening letter names the tax and the period, asks specific questions, lists the records wanted, and gives a deadline, usually 30 or 40 days. It is not an accusation. It is also not optional: HMRC has statutory information powers, and refusing to provide records carries penalties of its own.

In this case the question was about motor expenses in one company tax return — a claim that had grown by about 60% in a year while turnover was broadly flat.

Why the answer took four months

The claim was entirely legitimate. A second van had been bought part-way through the year and there had been a lot more travel to a customer 90 miles away. Explaining that took one paragraph. Proving it took four months.

The mileage log was a note in a phone, in someone else's phone, updated occasionally. Fuel receipts existed but were in a carrier bag. The van purchase was in the accounts and the finance agreement was in a drawer. Nothing was invented, nothing was hidden, and none of it was in a form that answered the question asked.

That is the ordinary experience of a compliance check. It is rarely a moral event. It is an evidential one, and businesses lose on evidence, not on honesty.

HMRC is not asking whether you are a good person. It is asking what you can prove, four years after you stopped thinking about it.

The check widens, and how far back it can go

Once the records for one item look thin, it is normal for the questions to broaden — to other expense categories, to the directors' loan account, to how private use of a vehicle was handled.

How far back this can reach depends entirely on behaviour. The ordinary assessment window is four years from the end of the relevant tax period. Where the loss of tax was caused by carelessness, it extends to six years. Where it was brought about deliberately, it extends to twenty. That single distinction — careless or deliberate — is the most financially significant sentence in the whole process, and it is decided largely by how you respond, what your records show, and whether you disclosed the problem or were caught with it.

The penalty conversation

Penalties for inaccuracies are set under Schedule 24 of the Finance Act 2007 as a percentage of the extra tax due. A careless inaccuracy carries 0% to 30%. A deliberate one carries 20% to 70%. Deliberate and concealed carries 30% to 100%.

Where you land within a band depends on the quality of your disclosure — telling, helping and giving access. Coming forward before HMRC asks is an unprompted disclosure and attracts the lowest range. Waiting to be asked, then answering slowly and partially, sits at the top of a band. On a careless error, the penalty range can go all the way down to nothing, and HMRC can also suspend a careless penalty for up to two years against conditions designed to stop it happening again — usually the very record-keeping improvements you should have made anyway.

In this composite case the outcome was £3,180 of additional corporation tax, mostly from private use of a vehicle that had never been properly adjusted. Interest ran from the original due date at 7.75%, the rate applying from 9 January 2026 and set at four percentage points above the Bank of England base rate of 3.75%. The penalty was charged at 15% of the tax — £477 — and suspended on condition a proper mileage record was kept for two years. Accountancy fees to handle the correspondence came to about £2,400.

Read those numbers again in order. The tax was £3,180. The penalty was £477. The professional fees were £2,400 and the owner's own time was not counted at all. That ratio is the real lesson of nearly every compliance check a small business goes through.

What to do on the day the letter arrives

Do not reply immediately, and do not ring HMRC to explain informally. Send it to your accountant the same day and agree who is answering. Answer exactly what was asked, in writing, on time — nothing extra. Volunteering additional context feels cooperative and routinely opens a new line of enquiry.

If you already know something is wrong, say so early and in full. The difference between an unprompted disclosure and a discovery is worth more than any argument you can make later. If tax is owed and the cash is not there, ask about a Time to Pay arrangement rather than missing the deadline and adding penalties to the interest.

You also have appeal rights. Most decisions carry a 30-day window to appeal, request a statutory review by an HMRC officer not involved in the case, or go to the First-tier Tribunal. Reviews are free, and a meaningful proportion of decisions change.

What changes afterwards

The businesses that come out of this well nearly all make the same three changes, and none of them are dramatic.

Receipts get captured at the point of spending, by app, rather than collected in a bag for a year. Anything with a private-use element — vehicles, phones, a room at home, the company card used at the supermarket — gets an explicit, written basis for the split, agreed with the accountant, before the year end rather than after it. And the management accounts get looked at monthly rather than annually, which is where an expense line growing 60% against flat turnover gets noticed by you first. Fifteen minutes a month is enough, as reading your management accounts sets out.

None of that prevents a compliance check. A proportion really are random. What it changes is what a check costs you: a fortnight of mild irritation and a folder of documents, instead of four months and the growing suspicion that you cannot prove your own numbers. If the January bill is the part that catches you out, payments on account is the other piece of arithmetic worth having straight.

Common questions

How far back can HMRC go in a compliance check?

The ordinary time limit for assessing additional tax is four years from the end of the relevant tax period. If the underpayment was caused by carelessness — failing to take reasonable care, rather than any intention to mislead — that extends to six years. If tax was lost deliberately, or through a failure to notify chargeability, the window is twenty years. Offshore matters can extend to twelve years for income tax and capital gains tax. Which window applies is determined by behaviour rather than by the size of the error, which is why how you respond to the first letter matters so much more than most owners expect.

Does a compliance check mean HMRC thinks I have done something wrong?

Not necessarily. Checks are opened for several reasons: risk profiling against comparable businesses, a figure that moved sharply without an obvious explanation, a large or unusual claim, information from a third party such as a bank or online platform, and a proportion selected at random. The opening letter is a request for information, not an allegation. That said, treat it seriously from the first day. Answer precisely what was asked, in writing, by the deadline, and involve your accountant before you reply. Informal phone explanations are where avoidable problems usually begin, because nothing is recorded in your own words.

Should I use an accountant to handle it, and what will it cost?

Yes, in almost every case. The correspondence is technical, the wording of your answers affects whether behaviour is treated as careless or deliberate, and that distinction changes both the penalty range and how many years HMRC can assess. Professional fees for a straightforward single-issue check commonly run into four figures, and frequently exceed the tax at stake — which is why fee protection insurance, often sold by accountants for a modest annual premium, is worth considering before you ever need it. Check whether your existing accountancy engagement includes enquiry work, because many standard letters of engagement specifically exclude it.

Can a penalty be reduced or cancelled?

Yes. Penalties for inaccuracies are ranges, not fixed amounts, and where you sit within the range depends on the quality of your disclosure: telling HMRC about the problem, helping them quantify it, and giving access to records. A careless inaccuracy disclosed unprompted can be reduced to nil. HMRC can also suspend a careless penalty for up to two years, subject to conditions such as keeping specified records, and the penalty is cancelled if the conditions are met. Deliberate behaviour cannot be suspended. If you disagree with a decision, you generally have 30 days to appeal and can request a free statutory review.