What a Tax Enquiry Actually Looks Like

While taxes are said to be one of the two unavoidable facts of life, many rarely actively think about tax compliance. It doesn’t feel urgent, and you like to think you’ve done the right things based on your knowledge and the tax advice you’ve received. And then one day, something arrives in the post. That distinctive recycled yellow paper. HMRC’s return address. And inside, the news that your tax affairs are under investigation.

We spoke with Sarah Scala, Founder of the UK’s Contentious Tax Group and Daysium Founding Partner, to understand what happens next. Sarah works on tax disputes, representing individuals and companies through some of the most complex and stressful experiences a taxpayer can face, including tax residency challenges, fraud allegations, and criminal investigations. She’s there to help clients navigate some of the most stressful times of their lives.

What follows is an eye-opening conversation on what a tax enquiry actually looks like: how it starts, what happens during it, how it ends, and what runs through all of it.

The instinct is to think of the tax enquiry as something that begins with that initial letter. Yet, that’s just the starting point for you. For HMRC, they’ve been looking at your tax affairs and creating risk profiles long before you get the letter. 

HMRC’s CONNECT system is one of the most expensive databases in the world, drawing on government datasets from the DVLA, Land Registry, and many others. “That’s a form of AI that HMRC have been using for the last twenty years or so,” Sarah says. And the nudge letters generated today are a direct product of it. 

“At the click of a button, they can produce a set of names, mass-mail out these letters, and then get us advisors to do all the work.”

By the time any letter arrives, HMRC often already knows more than the taxpayer expects. Sarah has seen first letters that reference specific bank transactions and named counterparties. “It almost didn’t look like a first letter,” she says of one recent case. 

The reality is that a tax enquiry rarely comes out of the blue. The question then becomes whether your own records are as complete as HMRC’s.

Sarah told how the letter that lands on the doormat can, unfortunately, be dated about two weeks before the taxpayer receives it. The typical response window HMRC gives you is  30 days. That’s not a long window for responses, especially if you don’t even notice the letter straight away. Sarah recalled a case where the letter was issued on the 23rd of December and not opened until mid-January, for obvious holiday reasons. 

The most common mistake is understandable: taxpayers get the letter, see a long list of information requests, start gathering documents, ask HMRC for more time, and then consider engaging a specialist once they’ve done the paperwork.

But according to Sarah, that’s the wrong order. “Our role is not to act as some sort of post box once you’ve got your documents ready.”

A tax specialist’s first task, therefore, isn’t to gather but to filter. They review what HMRC has asked for and ask a prior question: are they even entitled to this? HMRC can only request information “reasonably required” to check the point at issue. That request must be proportionate to the perceived tax risk. A wish list is not a legal obligation.

“It’s very dangerous for clients to start letting HMRC lead things and just treating their wish list as an action plan and sending things off unsupported.”

Engaging a specialist can also reset the clock. Sarah’s standard approach is to contact HMRC immediately and request that the deadline restart from her date of engagement. She’s found it to be an approach HMRC accepts routinely.

Not all enquiry letters are the same, and the classification matters enormously.

• Code of Practice 8 focuses on complex tax avoidance or large tax underpayments without assumed fraud.
• Code of Practice 9 is used where HMRC are alleging tax fraud. 
• Then there is the possibility of full criminal investigation.

The classification shapes everything: strategy, years under review, and protections available. One of Sarah’s first tasks is to understand how and why the situation arose because the behaviour classification determines whether HMRC are entitled to look back four years or 20 years. 

“Sometimes I might think: let’s try our best to persuade HMRC this was a particular type of behaviour, and that means we only have to give them four years worth of tax.”

Sometimes the most important early conversation is not with HMRC at all. “It’s really important I speak to the clients and talk to them about the seriousness of all this, and give them the opportunity to tell me if it’s actually even worse. Because who knows, maybe there’s something else they’ve done that HMRC haven’t asked about that means they need to be protected from prosecution. And then we need to change strategy.”

Once engaged, a good tax enquiry specialist doesn’t simply respond to HMRC’s correspondence. They help shape it. This can include proposals that can help streamline the process even further. As Sarah emphasised, “It’s really important that you’re not appearing to be against them [HMRC].”

Sarah says that deadlines must be taken seriously, and there’s no reason that responses can’t be sent before the deadline, not on the final day. “If every piece of correspondence is sent off just a week before, over a two-year investigation, that can make a big impact.” 

“If every piece of correspondence is sent off just a week before, over a two-year investigation, that can make a big impact.”

As Sarah puts it, lag is the enemy. “A relatively long enquiry, let’s say three or four years, a lot of that will just be dead time”, and both sides can cause it.

The financial cost of a tax enquiry is visible and well understood by clients. The human cost is less often discussed.

Investigations consume time and mental energy over months and years. They draw out disclosures that clients haven’t made to anyone else. “Often our clients are telling us things they don’t tell anybody else. Not even their spouses.”

“Often our clients are telling us things they don’t tell anybody else. Not even their spouses.”

One of Sarah’s most memorable cases involved a woman resolving tax avoidance her husband had entered into. It was avoidance she knew nothing about until she opened his post after he died. Both Sarah and the widow believe the stress of the investigation could have contributed to his fatal heart attack. 

By the time Sarah was involved, the widow had been trying to handle the investigator herself. While she was a competent lady, she had been unable to set time aside for grief while being tied up in the paperwork.

“My role is to listen to what’s happened, crunch the numbers, work with the investigator, and get this sorted.”

In the end, they resolved it. “That’s the best part of the job — knowing that you’ve really helped people get through a really difficult time.”

Running through every stage of an enquiry is a single question: Can you prove it?

The burden sits with the taxpayer and their advisers. For a tax residency enquiry, that means records of physical presence, written advice on residency obligations, and records maintained at the time, not reconstructed under pressure. The Statutory Residence Test varies depending on personal circumstances and prior years. Demonstrating that you understood which tests applied to you and acted accordingly is the difference between a taxpayer who took reasonable care and one who simply hoped for the best.

Professional guidance carries evidential weight. “That can be very helpful in putting forward arguments that a taxpayer took reasonable care,” Sarah says. Using Daysium, which is built with adviser input specifically around the SRT, is, in her view, the functional equivalent. 

“I would suggest that using the Daysium app is the equivalent to receiving professional advice, because I know how many advisers have fed into that with you.”

A well-managed enquiry doesn’t drag unnecessarily. Sarah said that the ideal outcome of a nudge letter is a full voluntary disclosure built by an adviser who has already worked out which years are in scope and why. “A good adviser will have preempted any questions and put forward something so persuasive that HMRC are just happy to bank the funds — because you’ve provided a sense check of exactly why that’s the right figure — and then they can move on to the next one.”

The result worth working for isn’t always a reduction in the tax bill. Sometimes it’s a reduction in years, or a penalty classification that reflects carelessness rather than deliberateness, because carelessness may mean HMRC are out of time to collect at all. “Rarely would HMRC say: we thought it could be deliberate, but actually it’s careless and therefore we’re out of time. It takes somebody like us to present a case for that.”

“I’m always thinking about how to present wins to the client and how to persuade HMRC something’s a win for them.”

For internationally mobile individuals, an HMRC enquiry is not as remote a possibility as some may think. It is a function of how HMRC now operates: data-led, systematic, and well-informed before they ever make contact.

The mistake is assuming that because your movements are normal and your intentions are honest, the records will take care of themselves. Sarah’s advice is direct: build the evidence bank before any challenge arises. “Absolutely I would endorse the record-keeping, the preemptive behaviours — almost gathering this data bank, a defence if you like, for the event of a possible HMRC challenge.”

An enquiry that arrives after everything is already documented is manageable. One that arrives when records need to be rebuilt from memory is something else entirely. The difference comes down to what was captured before the letter arrived.