HMRC is actively monitoring your financial activities.

When dealing with HMRC, several warning signs can trigger investigations, penalties or compliance checks. 

Here are some key areas to avoid:

• Inconsistent Income Reporting: Submitting tax returns that do not align with information HMRC already holds, such as from employers, banks or other sources, can lead to an enquiry.

• Unexplained Lifestyle vs. Declared Income: If your spending habits or visible lifestyle (e.g. new cars, expensive holidays) do not match your reported income, HMRC may suspect undeclared earnings.

• Late or Missing Tax Returns: Consistently filing late or failing to file returns entirely raises suspicion and may result in automatic penalties.

• Unusual Deductions or Claims: Submitting expenses or tax relief claims that appear excessive, irregular or unrelated to your work could trigger a review.

• Frequent Changes in Business Structure: Regularly switching between sole trader, partnership and limited company status without clear reasoning may attract attention.

• Cash-Heavy Trading: Where the records do not match the real world. HMRC will cross-check card machine data, supplier invoices and till records.

Top Tip: Maintain thorough records, file on time and ensure all declarations are accurate.
Transparency is your best defence against a HMRC investigation. Stop using your personal bank account (PayPal, Wise account) for business transactions. Having separate business and personal accounts adds transparency and clarity.

HMRC Connect: This service cross-checks your financial transactional data.
Also, since January 2024, platforms like Etsy, Vinted, eBay and Uber automatically report your earnings to HMRC.

Above all, do not underestimate HMRC. Regardless of the sector you operate in or the unique nature of your circumstances, HMRC has encountered similar situations before.