How HMRC select cases for investigation
An HMRC enquiry is a major event for individuals and businesses: in time, in cost and in stress. Knowing more about how HMRC select cases for investigation – as part of a bigger-picture understanding of how an enquiry typically originates and proceeds – will help you to consider your risk of an enquiry, and to be ready for the disruption that one may cause.
HMRC rely on a risk-based approach when selecting cases for investigation. Although some cases are selected randomly, HMRC’s own Compliance Handbook is explicit that an investigation should not be opened unless there is an identified risk.
HMRC identify cases for investigation via a number of ways.
Connect: HMRC’s main case selection tool
Connect is a data-mining, networking and risk profiling system that cross-references every UK tax return against multiple external data sources.
It identifies over 500,000 cases per year for HMRC to investigate.
Connect’s sources include:
HMRC’s own data – e.g. returns for self-assessment, corporation tax, VAT, PAYE and CIS
- Banks and building societies – interest reports, transactions, overseas balances etc
- Land Registry and council tax data
- Vehicle ownership data from the DVLA
- Companies House and credit reference agencies
- Online marketplaces and other websites – under the digital platform reporting rules, e.g. eBay, Vinted, Airbnb, Etsy, Just Eat
- Payment providers – e.g. PayPal, Stripe, digital wallets
- Overseas tax authorities – via the Common Reporting Standard (CRS)
- Social media and online lifestyle indicators
- Data leaks – e.g. HSBC, Panama Papers
Other HMRC sources for selecting investigations
Linked enquiries
In our experience, these happen often. For example, if a company is under investigation because of a risk already identified, HMRC may open enquiries into directors of that company.
Enquiries into companies in the same group are also common.
Indirect links between taxpayers
If an enquiry into one taxpayer highlights potential issues with a taxpayer not directly linked, such as a supplier, HMRC can be expected to look into that other taxpayer.
It’s likely that criminal investigations feed into civil investigations.
Third party information
As well as information from other government departments and overseas tax authorities which feeds into Connect, HMRC also receive information from whistleblowers and informants.
HMRC’s Strengthened Reward Scheme incentivises informants to report serious tax avoidance or evasion.
HMRC campaigns
HMRC’s ‘one to many’ campaigns send a standard message to targeted taxpayers. Known as nudge letters, these messages encourage taxpayers to comply with their tax obligations and disclose undeclared income and gains.
The campaigns target taxpayers who HMRC consider as high risk.
This includes property owners, those with overseas assets, company directors with overdrawn loan accounts, investors in cryptoassets and cash-based trades, R&D claims, umbrella companies and labour supply chains, and wealthy individuals (high net worth).
Random enquiries
HMRC’s Enquiry Manual states that a small proportion of tax returns are selected for enquiry entirely at random.
This includes both non-business taxpayers and small-medium businesses. This is why tax fee protection insurance is widely recommended to eligible taxpayers.
The aim is to ensure that HMRC check all areas of the self-assessment population and not just those perceived to be high risk.
There is no indication from HMRC whether a case has been selected at random or has been risk-assessed.
How BKL can help
Our Tax Risk & Dispute Resolution team have a strong understanding of the underlying risks that HMRC are trying to address through their investigations.
We can help you to proactively manage your tax risk, narrow the scope of enquiries and progress matters to conclusion as quickly as possible.
To discuss your situation in confidence, please get in touch with your usual BKL contact or Piyush Patel using the form below.
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Frequently asked questions: how HMRC select cases for investigation
How likely is it that HMRC will investigate my tax return?
Any taxpayer can be investigated, but most HMRC enquiries are risk-based rather than purely random. HMRC typically open enquiries where they identify information, behaviour or transactions that suggest a higher compliance risk.
Risk indicators can include unusual claims, significant changes in income or profit levels, inconsistencies between different tax returns, repeated filing errors, or information received from third parties. However, HMRC also select a small proportion of cases at random as part of its compliance activity.
What are the most common reasons HMRC open an investigation?
The most common reasons are discrepancies, unusual patterns or information that does not appear to match HMRC’s records. These issues are often identified through HMRC’s Connect system and other data sources.
Examples may include undeclared income, unusually large tax relief claims, substantial VAT repayments, discrepancies between PAYE and self-assessment records, overseas assets, property income that has not been reported, or sudden changes in a business’s financial performance. Persistent late filing or repeated amendments to returns may also attract additional scrutiny.
Can HMRC investigate me because of information from banks, online platforms or payment providers?
Yes. HMRC receive information from a wide range of third parties and increasingly use this data to identify potential compliance risks.
Information may come from banks, building societies, online marketplaces, payment providers, Companies House, the Land Registry, overseas tax authorities and other sources. This means that income generated through activities such as online selling, property letting, freelance work or overseas investments may be visible to HMRC even if it is not reported directly on a tax return.
Do HMRC monitor social media and online activity?
HMRC can use publicly available online information as part of their compliance work. This can include social media content and other digital information where it may be relevant to a taxpayer’s affairs.
For example, publicly visible evidence of significant spending, luxury assets, business activity or property transactions could potentially be reviewed alongside tax records. Social media alone will not necessarily trigger an enquiry, but it may contribute to HMRC’s wider risk assessment where other concerns already exist.
If my company is investigated, can HMRC also investigate me personally?
Yes. Linked enquiries are common where HMRC believe there may be connections between individuals and businesses.
For example, if HMRC open an enquiry into a company, they may also review the tax affairs of directors, shareholders or connected parties. Similarly, enquiries can extend to other companies within the same group structure. Businesses should therefore consider tax risk across the wider organisation rather than focusing solely on a single entity.
What happens if HMRC finds issues with one of my suppliers or business partners?
An enquiry into one taxpayer can sometimes lead HMRC to investigate others connected to the same transactions or arrangements.
If HMRC identify concerns involving suppliers, contractors, customers or other commercial relationships, HMRC may seek information from those parties or open separate enquiries. This is particularly relevant in sectors with complex supply chains, labour arrangements, subcontracting or cross-border transactions.
Are some industries more likely to be targeted by HMRC?
HMRC regularly focus compliance activity on sectors, behaviours and transaction types they consider higher risk.
Targeted activity often includes property businesses, cryptoasset investors, cash-intensive trades, taxpayers with overseas income or assets, company directors with overdrawn loan accounts, labour supply chains, umbrella company arrangements and certain R&D tax relief claims. Being in a targeted sector does not mean an enquiry is inevitable, but businesses should ensure their records and reporting are strong.
Does receiving an HMRC nudge letter mean I am being investigated?
Not necessarily. A nudge letter is not usually a formal tax investigation.
These letters are commonly sent to taxpayers whom HMRC believe may need to review a particular aspect of their tax affairs. The letter typically encourages voluntary disclosure or confirmation that the taxpayer’s position is correct. While a nudge letter does not automatically lead to an enquiry, ignoring it can increase the likelihood of further HMRC scrutiny if concerns remain unresolved.
Is it a misconception that only taxpayers who have done something wrong get investigated?
Yes. Many people assume an HMRC enquiry means wrongdoing has already been established, but that is not the case.
Some enquiries are opened because HMRC want to verify information, understand a transaction or investigate an identified risk. Others are selected randomly. An enquiry is a process for gathering evidence and testing a tax position, not proof that tax has been underpaid. Nevertheless, responding appropriately and keeping comprehensive records is essential.
What should I do if I am concerned that HMRC may investigate me?
The best approach is to review any potential risk areas before HMRC contact you. Early action can often reduce disruption and help resolve issues more efficiently.
This may involve checking that tax returns are accurate, ensuring supporting records are complete, reviewing historic claims or disclosures, and obtaining professional advice where a tax position may be uncertain. Businesses and individuals who understand their risk profile are generally better placed to manage an enquiry if one arises.
