What does HMRC look at in a corporation tax enquiry?

HMRC usually starts by comparing the figures on the CT600 and the accounts against what it expects for a business of that size and sector. Turnover and gross profit margin are common starting points, particularly if margins have shifted noticeably from the previous year without an obvious explanation in the accounts.

Expenses are reviewed for whether they're wholly and exclusively for the trade under section 54 Corporation Tax Act 2009, with particular attention to categories that mix business and personal use, such as motor expenses, travel, subsistence, and use of home. Director's remuneration, dividends, and the director's loan account are near-universal areas of interest, since these transactions sit between the company and the individual and are where HMRC most often finds errors.

Capital allowances claims, including the annual investment allowance and any claims for plant and machinery, are checked against invoices and asset registers. Where the company has claimed a specific relief, such as R&D tax relief, HMRC will scrutinise the eligibility conditions for that relief closely, often as a separate strand of the same enquiry.

HMRC's opening letter should indicate whether it's opening a full enquiry, covering the whole return, or an aspect enquiry limited to a specific point, such as one expense line or a single claim. Aspect enquiries are more common and usually quicker to resolve, provided you can support the figure in question.

An aspect enquiry can still widen into a full enquiry if HMRC's initial questions uncover other issues, or if the records you provide don't tie back cleanly to the figures on the return. Keeping your response focused on what's been asked, and consistent with the rest of the accounts, reduces the chance of that happening.

HMRC's power to request records during an enquiry comes from Schedule 36 Finance Act 2008, which lets it ask for documents and information reasonably required to check the company's tax position. This typically includes the nominal ledger, bank statements, invoices supporting significant expense claims, board minutes for dividends, and any contracts relevant to the area under review.

You don't have to hand over everything at once, and you're entitled to query a request that seems disproportionate to the point being checked. Genuine disputes about the scope of an information notice can be appealed, but outright refusal without good reason risks a formal notice and, ultimately, penalties.

Knowing what HMRC typically checks lets you prepare proactively rather than reactively. Before responding to an enquiry, review the areas above against your own accounts and identify anything that might look unusual to someone outside the business, even if you know the explanation is straightforward.

Where a figure relies on judgement, such as an accrual, a provision, or an apportionment between business and personal use, write down the basis for it now. HMRC responds well to a clear, documented rationale, even where it later disagrees with the conclusion.

There's no charge simply for HMRC checking your return, but a full enquiry into several areas can take considerably longer, and professional time to manage it properly adds up.

If HMRC's review finds an underpayment, expect interest to run from the original due date, and potentially a penalty under Schedule 24 Finance Act 2007 depending on why the error happened.

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