What Triggers a Corporation Tax Investigation?

HMRC opens around 30,000 Corporation Tax enquiries each year. Some are random, HMRC is entitled to open an enquiry into any return, for any reason, within 12 months of the filing date. But most are not random. They are the result of HMRC's risk profiling systems identifying something in a return, or in a company's filing pattern, that warrants a closer look. Understanding what flags a company for attention is the first step toward not being flagged.

How HMRC selects returns for enquiry

HMRC uses a system called Connect, a large-scale data matching platform that cross-references CT600 returns against data from Companies House, Land Registry, bank reports under the Common Reporting Standard, VAT returns, PAYE records, third-party data providers, and the personal Self Assessment returns of the company's directors and shareholders.

Connect identifies discrepancies: a director receiving dividends that are inconsistent with the company's reported profit, a company with significant VAT turnover but low corporation tax profit, a property transaction that does not appear in the company's accounts, or a salary payment that appears in the company's payroll data but not in the directors' tax returns.

HMRC does not need a reason to open an enquiry, but in practice, Connect-generated risk scores mean most enquiries are anything but random. Companies that file consistently, accurately, and whose data cross-checks cleanly are materially less likely to be selected.

Common filing patterns that attract attention

Losses claimed repeatedly or in unusual amounts

A company that reports losses year after year while its directors appear to maintain a comfortable lifestyle is a classic enquiry trigger. HMRC's Connect system can compare the reported profitability against the directors' personal expenditure inferred from credit card data, property records, and overseas travel. Persistent losses combined with high director drawings, even structured as loans, are a known red flag.

Profit margins out of line with the sector

HMRC maintains industry benchmarking data for hundreds of business types. A restaurant that reports a net margin of 2% when the sector average is 8% will attract scrutiny. So will an IT consultancy claiming unusually high costs relative to turnover. This does not mean below-average profitability is wrong, but it should be explainable.

Large or first-time R&D claims

R&D tax relief claims are subject to additional scrutiny, particularly since the widespread abuse of the SME scheme that HMRC tackled from 2022 onwards. A first-time R&D claim, a claim that is very large relative to the company's turnover, or a claim prepared by a firm that HMRC has previously challenged, are all factors that increase enquiry risk. The advance notification requirement introduced in 2023 was partly designed to give HMRC visibility of claims before they are submitted.

Director's loan accounts

A director's loan account that is overdrawn at the year end, where the director owes money to the company, creates a s455 tax charge (currently 33.75% of the outstanding balance). If the loan is repaid within nine months of the year end, the s455 charge is not due. HMRC's system can identify where s455 was not charged and the loan was large, and cross-check whether the repayment genuinely occurred or whether a circular payment arrangement was used to clear and redraw the loan.

Capital gains not reported

The sale of a business asset, property, goodwill, shares, should appear in both the CT600 and, where relevant, in Land Registry or Companies House records. Connect cross-references these. A property disposal that appears at Companies House but generates no CT gain is a common trigger for an enquiry.

Inconsistencies between returns

Mismatches between a company's CT600, its VAT return, and its payroll data are a strong signal. If the CT600 reports £200,000 turnover but the VAT return implies £350,000 (after adjusting for the VAT-exclusive/inclusive difference), that discrepancy is visible to Connect. Similarly, salary costs in the CT computation that do not match PAYE filings will be flagged.

Types of enquiry: aspect vs full

If HMRC does open an enquiry, it will be one of two types:

An aspect enquiry can escalate into a full enquiry if HMRC finds significant irregularities while investigating the specific aspect. They cannot legally convert the enquiry without issuing a new notice, but in practice the distinction can blur once material issues are found.

Time limits for HMRC to open an enquiry

HMRC's ability to go back in time is not unlimited, but it is long:

• Standard: 12 months from the date the CT600 was filed (or the filing deadline, if filed late)
• Careless error: 6 years from the end of the accounting period
• Deliberate error: 20 years from the end of the accounting period

The 20-year limit for deliberate errors is not theoretical. HMRC regularly uses discovery assessments to raise charges for periods going back a decade or more where evidence of intentional misrepresentation is found.

What to do if HMRC opens an enquiry

Receiving an enquiry notice is not the same as being accused of wrongdoing. Most enquiries are closed without any additional tax being due. The right response is:

1. Do not respond directly to HMRC, appoint your accountant or a tax adviser to handle correspondence from the outset
2. Gather the records requested: bank statements, invoices, payroll records, board minutes
3. Do not volunteer information beyond what is asked, answer the specific questions raised
4. Check whether your professional indemnity or tax investigation insurance covers the cost of responding