What to do if HMRC opens an enquiry: first steps for small business owners

Getting a letter from HMRC saying they’re opening an enquiry is one of those moments every small business owner dreads. I’ve supported many clients through this exact situation, and while it’s stressful, it’s usually manageable if you act calmly and methodically. Below I walk through the first steps I take (and that I recommend my clients take) when HMRC contacts them, what to expect, and practical actions to protect your business and keep the process as straightforward as possible.

Stay calm and read the letter closely

The first thing I do is breathe and read the HMRC communication carefully. HMRC enquiry letters are usually specific about:

• Which tax return or period is under enquiry (e.g. a particular Self Assessment year, company tax return, VAT return, or PAYE period).
• The nature of the enquiry — whether it’s a full compliance check, a targeted query about one item (e.g. expenses, turnover), or a routine verification.
• The deadline for responding or for supplying documents.

I highlight dates and any specific requests. Missing a deadline quietly makes things worse — so note the response date and plan to act before it.

Don’t panic — don’t over-share either

It’s natural to want to reply immediately with everything you have, but an overly hasty reply can create problems. Equally, trying to hide something or destroy records is both illegal and usually the quickest way to escalate penalties. My approach is to be cooperative and factual: provide the documents requested, explain any reasonable discrepancies, and don’t volunteer unrelated information.

Contact your accountant or adviser immediately

If you work with an accountant (and if you don’t, consider this a key takeaway), get them involved right away. An experienced adviser will:

• Interpret the letter and tell you if it’s routine or serious.
• Advise on which documents to supply and how to present them.
• handle communications with HMRC on your behalf if you give them authority.

If you haven’t got an accountant, phone HMRC’s number on the letter to clarify the request and the deadline, and then consider getting professional help — the cost of good advice usually pays for itself through reduced risk and better outcomes.

Gather and organise the documents HMRC has asked for

HMRC typically asks for copies of source documents rather than month-by-month narrative. Common requests include:

• Bank statements and reconciliations
• Sales invoices and customer credits
• Purchase invoices and receipts
• Payroll reports and PAYE records
• VAT returns and supporting VAT invoices
• Contracts, lease agreements, or invoices for large purchases

I find it helps to prepare a short cover note that lists the documents supplied and points HMRC to key items (for example: "see bank statement page 3 showing a £9,500 receipt from ACME Ltd on 12 March"). Clear labelling saves time and reduces follow-up queries.

Use digital accounting tools to your advantage

If you use cloud accounting (Xero, QuickBooks, FreeAgent) or a digital filing system, pull the exact reports they ask for and export PDFs with clear file names. These systems often have audit trails and reconciliations that explain some anomalies — send those too. If you use spreadsheets, create a reconciliation sheet showing how the spreadsheet totals match bank statements and VAT returns.

Check whether a formal disclosure is needed

If the enquiry reveals an error or inadvertent underpayment, speak to your adviser about whether a voluntary disclosure is advisable. Voluntary disclosures made promptly can reduce penalties and are often treated more favourably than issues HMRC discovers through a hard enquiry. The calculation and strategy around this can be technical — it’s one of those areas where taking professional advice is worthwhile.

Keep good notes of all communications

Every phone call, email or meeting should be logged. I keep a simple timeline of events for each enquiry record that includes:

These notes matter if there’s any disagreement about what was asked or what you supplied.

Responding in writing — practical wording I use

When I or my clients respond in writing, I keep language concise and factual. A short template I use:

"Dear [Name], Thank you for your letter dated [date]. Please find enclosed copies of the documents you requested for the period [period]. If you need any further information or clarification, please let me know. Kind regards, [Name]"

If the matter needs explanation (for example, a timing difference or one-off sale), add a brief, numbered explanation referencing the documents supplied.

What to expect next — timescales and potential outcomes

• HMRC will review the documents; they may close the enquiry, ask for more details, propose adjustments, or arrange a discussion.
• If they propose adjustments, you’ll normally get a calculation and explanation. You can accept, negotiate, or appeal.
• Penalties and interest may apply where tax is due. Being cooperative and prompt often reduces penalties.

If HMRC raises a query about VAT, PAYE or other managed regimes the process is similar but can involve additional evidence (e.g. payroll RTI reports). If the case becomes a full investigation, legal advice may be necessary.

Practical tips to reduce stress and risk during an enquiry

• Do not delete or alter original files or emails — retain original records.
• Keep communications polite and factual; avoid admitting liability in the first contact without advice.
• Use cloud backups (Dropbox, Google Drive) or practice management tools to keep documents accessible and dated.
• Meet deadlines — if you can’t, ask HMRC for a short extension and explain why.
• Consider getting indemnity insurance or a compliance support package if you expect regular enquiries (some accountants offer this).

When to involve a solicitor

Most enquiries are routine tax compliance matters and are handled by accountants. You’ll want a solicitor involved if HMRC hints at criminal investigation, you’re accused of deliberate fraud, or there’s potential for personal criminal exposure. In those cases, stop substantive discussions until you have legal representation.

Remember: an HMRC enquiry is inconvenient, but it isn’t necessarily catastrophic. Acting quickly, staying organised, and getting professional help where needed keeps things under control. If you want, I can review your HMRC letter and recommend next steps tailored to your situation — I’ve guided many small business owners through these exact steps and can help you avoid common pitfalls.