Making Tax Digital (MTD) changes how you report your income, and it also changes how HMRC reviews it. While most businesses will never face a full investigation, MTD gives HMRC more frequent data and more visibility. This, ultimately, means more opportunities to spot issues early. So, what actually happens if your account is flagged? Keep reading to find out more.
What is a HMRC investigation?
A HMRC investigation, also known as a compliance check, is when HMRC takes a closer look at your tax affairs to make sure everything is accurate and complete. This doesn’t always mean a full audit and can range from:
● A simple request for more information
● A check on a specific return or time period
● A full review of your records and reporting
Why MTD increases the chances of checks
Before MTD, HMRC typically saw your figures once a year but now they get quarterly updates plus a final MTD tax return. In short, they have more data and more check-ins with you.
Don’t panic though. HMRC isn’t looking for perfect accounts, but it is looking for consistency. You’re more likely to be flagged if you have:
● Frequent missed submissions
● Large differences between quarterly updates and your final MTD tax return
● Unusual spikes or drops in income or expenses
● Figures that don’t match other data HMRC holds (from employers, banks or platforms)
● Poor or incomplete digital records
Technically, you could be investigated if you miss a single quarterly update, but this is rare. You may be on HMRC’s radar, though.
What happens if you’re investigated?
If HMRC decides to look into your account, the process is usually straightforward, but it can feel stressful if you’re unprepared.
1. You’re contacted
HMRC will send a letter or message explaining they’re checking your tax return or records. They’ll outline what they want to review and why.
2. You’re asked for records
This could include:
● Income and expense records
● Bank statements
● Details behind specific figures
Under MTD, these should already be stored digitally.
3. They review your data
HMRC will compare what you’ve submitted against your records and other data sources.
4. Outcome
There are a few possible outcomes:
● No further action
● Corrections required
● Penalties applied (if inaccuracies are serious or repeated)
In more serious cases, they may widen the investigation to cover multiple years.
Where penalty points fit in
HMRC has moved to a points-based system which is designed to punish persistent offenders rather than one-off mistakes. This runs alongside investigations but it’s not the same thing.
● How it works: Every time you miss a submission deadline (like a quarterly update), you get 1 penalty point.
● The threshold: For quarterly filers, you have a limit of 4 points.
The fine: Once you hit 4 points, you’ll receive an automatic £200 fine. Every missed submission after that triggers another £200 fine.
Points don't last forever. If you manage to not get any further points for a set period (usually 12 months for quarterly filers) and catch up on all outstanding returns, your points reset to zero. These penalty points are designed to deal with late filing behaviour, whereas investigations focus on data accuracy and compliance.
The soft landing
There is some good news. For the first year of Making Tax Digital for Income Tax (April 2026 - April 2027) HMRC has revealed there will be no penalty points for late quarterly updates.
But this grace period doesn’t apply to your final MTD tax return due on 31st January or your actual tax payments. Late payments still incur interest and penalties from day one. And importantly, HMRC can still carry out investigations during this period.
How to reduce your risk
You don’t need perfect books, but you do need clear and consistent ones. So, to stay off HMRC’s radar:
● Keep records up to date and don’t leave it until year-end
● Make sure your quarterly updates are consistent with your final return
● Use digital software (this is a legal requirement under MTD)
● Check unusual figures before submitting
● File on time to avoid building a pattern
The bottom line
HMRC investigations aren’t triggered by a single mistake, but they might be triggered by patterns that don’t make sense. Ultimately, the more organised and consistent your records are, the less likely HMRC is to take a closer look. That’s where tools like Coconut come in helping you keep everything accurate, up to date and ready if HMRC ever asks questions.
