Corporation Tax Enquiry: What to Do When HMRC Opens One

A corporation tax enquiry letter is HMRC's formal notice that it intends to check a Company Tax Return. It is issued under Paragraph 24, Schedule 18, Finance Act 1998, and must normally be given within twelve months of the filing date for a return delivered on time.

The letter should state the accounting period under review and the aspects HMRC wants to examine, sometimes described as an 'aspect enquiry' rather than a full review. It is not an accusation of wrongdoing; it is a statutory check that any company can face.

Some enquiries begin narrowly, focused on one line of the accounts, and widen if HMRC finds inconsistencies. Reading the scope carefully at the outset helps the company understand what is actually being tested.

HMRC selects returns for enquiry using risk-based data analysis, sector comparisons, and information from third parties such as banks, other government departments or Companies House filings.

Common triggers include a significant year-on-year change in profit or expenses, a Research and Development claim, unusual related-party transactions, loans to or from directors, or a mismatch between the accounts and other filings such as VAT returns.

A random or routine selection is also possible; an enquiry letter alone does not mean HMRC believes the return is wrong. It means HMRC wants to verify that it is correct.

HMRC can request information and documents that are reasonably required to check the company's tax position, using an information notice under Schedule 36, Finance Act 2008. This typically covers company bank statements, invoices, contracts and board papers.

Requests for a director's personal bank statements are more contentious. HMRC must show a genuine link between personal finances and the company's tax position, for example where funds appear to have moved between the company and the director without explanation.

You can ask HMRC to explain why a document is needed, and you can appeal certain information notices to the First-tier Tribunal within 30 days. Refusing to comply with a valid notice can lead to penalties, so any objection should be raised formally rather than by simply not responding.

There is no fixed statutory length for a corporation tax enquiry. A single-issue query with clear records might close within a few months, while an enquiry involving multiple accounting periods, directors' loans or offshore matters can run well over a year.

The enquiry ends when HMRC issues a closure notice under Paragraph 32, Schedule 18, Finance Act 1998. This states HMRC's conclusions and, if applicable, amends the return. If HMRC is slow to close the matter, the company can apply to the tribunal for a direction requiring closure.

Once closed, any additional tax, interest and penalty becomes payable, subject to appeal rights on the closure notice and any penalty assessment.

Penalties for an incorrect Company Tax Return arise under Schedule 24, Finance Act 2007, and depend on behaviour: careless error, deliberate understatement, or deliberate with concealment. Each category carries a different penalty range, with higher exposure for deliberate conduct.

Whether the disclosure was prompted by HMRC contact or made unprompted by the company also affects the range. A prompt, full and helpful disclosure, sometimes described as telling, helping and giving access, generally reduces the penalty within the applicable band.

Directors should avoid downplaying or overstating what happened. An accurate explanation of how the error occurred, supported by contemporaneous records, is usually the most effective way to reduce penalty exposure.

A frequent mistake is answering HMRC's questions informally by phone or email without keeping a clear written record, which can lead to inconsistencies later in the enquiry.

Another is sending HMRC a large, unindexed bundle of documents rather than a focused response tied to the questions asked. This can invite further, broader questioning rather than closing the point.

Some directors also assume that because the company is the taxpayer, they have no personal exposure. Where HMRC identifies a director's overdrawn loan account, undeclared benefits, or personal involvement in deliberate inaccuracy, personal liability or separate penalties can follow.

Yes, in some circumstances. HMRC can still enquire into or raise a discovery assessment on a return filed before the company was struck off or dissolved, particularly if it suspects an inaccuracy that was not fully disclosed.

Where a company has been dissolved, HMRC can apply to have it restored to the register specifically to pursue an outstanding tax liability. Directors of a dissolved company are not automatically personally liable, but liability can arise where there was a breach of duty, a loan account was left overdrawn, or a distribution was unlawful.

For example, a small trading company closed after a director wound it down informally. HMRC later queried a large expense claimed in the final period. Because records had been retained rather than discarded, the adviser was able to reconcile the figure and the enquiry closed with no adjustment, illustrating why record retention matters even after closure.