Tax investigations are increasing.

Tax investigations used to feel like something reserved for multinational groups, celebrity tax scandals, or businesses hiding money offshore. That is no longer the case.
Today, HMRC enquiries are increasingly targeting ordinary SMEs — from agencies and consultants to e-commerce brands and growing owner-managed businesses, and the numbers explain why. HMRC estimates the UK tax gap reached £46.8 billion in 2023–24, with small businesses responsible for around 60% of the total. Source: HMRC Tax Gap Report At the same time, HMRC has significantly expanded its compliance capabilities through automation, data analysis, and digital reporting.
The government has announced plans to recruit thousands of additional compliance officers, with expectations those teams could generate an extra £7.5 billion annually through compliance activity by the end of the decade. That is a fairly direct statement of intent. Source: Office for Budget Responsibility.
HMRC also reported generating £48 billion through compliance activity in 2024–25 alone. Source: HMRC Annual Report
This is no longer simply about catching deliberate tax evasion, it is about identifying anomalies at scale.

 

What actually triggers an investigation?

Most SME investigations do not begin because HMRC suspects criminal activity. In reality, enquiries are often triggered by relatively normal business changes, including:
  • VAT returns differing from industry averages
  • Gross margins changing unexpectedly
  • Director salaries fluctuating significantly
  • Payroll inconsistencies
  • Large expense claims
  • Rapid growth compared to previous years
  • Corporation tax figures not aligning with VAT or PAYE submissions
HMRC’s “Connect” system cross-references data from VAT filings, payroll submissions, banking records, Companies House, online marketplaces, and other third-party sources to identify unusual patterns. Source: Financial Times.As the Financial Times reported:

“The fact that HMRC is using big data … shows that it is working.”

This creates a slightly uncomfortable reality for SMEs; you can do absolutely nothing wrong and still find yourself in a lengthy conversation with HMRC.

 

The real cost of an enquiry

One of the biggest misconceptions around tax investigations is that the main risk is additional tax. In practice, the bigger cost is often the disruption. Even relatively straightforward enquiries can consume months of management time. Records need gathering. Explanations need preparing. Accountants need to respond.
This can cause professional fees to accumulate quickly. Complex HMRC enquiries can regularly exceed £10,000 in accountancy costs, particularly where investigations stretch over multiple years, even where no deliberate wrongdoing is found. Source: Hentons. That is the frustrating part of investigations; you can technically “win” the case and still lose significant time, money, and energy getting there.

 

Why more SMEs are considering investigation cover

Making Tax Digital and digital reporting have made compliance more efficient, but they have also made businesses easier to benchmark and analyse at scale. Today, businesses are no longer assessed purely on whether returns are submitted on time. Increasingly, they are assessed on whether their figures look consistent compared to expected patterns.
As a result, many SMEs are starting to view tax investigation cover differently. It is no longer seen as protection for businesses doing something wrong.Instead, it is increasingly viewed as protection against the cost of being asked questions in a system where enquiries are becoming more common, more data-driven, and far more automated than ever before.