Expert Reveals 6 Common Mistakes That Can Trigger HMRC Investigations In 2025.

As the 2025/26 tax year approaches, HMRC is intensifying its scrutiny of individuals and small businesses across the UK. Every year, thousands of taxpayers find themselves under investigation, and often, it’s due to errors that could have been avoided.

For freelancers, founders and small business owners, understanding what triggers these investigations is more important than ever.

Chris Roberts, Managing Director of Capital Allowance Review Service, has seen first-hand the mistakes that put taxpayers on HMRC’s radar. With a multidisciplinary team – including chartered surveyors, tax specialists and ex-HMRC inspectors – Roberts has helped countless clients navigate tax compliance, identify overlooked reliefs and avoid unnecessary stress.

Here, he highlights six common red flags that can lead to an HMRC investigation and shares practical tips to help you stay compliant.

Living Beyond Your Declared Means

One of the most obvious red flags is when your lifestyle does not match your declared income. Driving a luxury car, taking frequent expensive holidays or living in a high-value property while reporting modest earnings is likely to trigger HMRC’s attention.

“HMRC uses sophisticated data matching to compare your declared income with your spending patterns,” Roberts explains. “They cross-reference information from banks, land registry records and even social media. If the numbers don’t add up, it raises questions.”

To remain compliant, ensure all income streams – including investments, rental income and side businesses – are accurately reported. Being transparent and consistent with your financial disclosures is essential for avoiding scrutiny.

Operating a Cash-Heavy Business

Businesses that primarily deal in cash, like restaurants, salons or tradespeople, are inherently higher risk in HMRC’s eyes. Cash transactions are harder to trace, making them more susceptible to underreporting, whether intentional or accidental.

Roberts advises: “If you run a cash-based business, meticulous record-keeping is non-negotiable. Bank all your takings, use a proper till system, and maintain detailed records of every transaction. This creates a clear audit trail if HMRC comes knocking.”

Maintaining clarity and consistency in financial records not only reduces the likelihood of an investigation but also simplifies tax filings.

Late or Incorrect Tax Filings

Missing deadlines or submitting inaccurate returns is another common trigger. Even minor mistakes can signal disorganisation, and repeated issues may appear as deliberate avoidance. That’s definitely not something you want.

“One late filing might be forgiven, but a pattern suggests issues,” says Roberts. “Set reminders well before deadlines and consider using an accountant to ensure accuracy.”

Proactive management of deadlines and a commitment to accuracy are critical. Using accounting software or professional assistance can reduce the risk of human error.

Failing to Keep Personal and Business Finances Separate

Mixing personal and business finances is a frequent mistake among sole traders and small business owners. Blurring these lines makes it difficult to track legitimate expenses and can raise suspicions during an investigation.

“Open a separate business bank account from day one,” Roberts recommends. “Pay yourself a salary or drawings rather than dipping into business funds for personal expenses. This clarity protects you if HMRC queries your accounts.”

Separating finances not only safeguards your business but also creates transparency, which is highly valued by HMRC during reviews. And on top of that, it can make your life significantly easier in the long run when it comes to organises tax.

Making Unrealistic Expense Claims

Claiming expenses is entirely legitimate, but the costs must be genuine and wholly business-related. HMRC algorithms flag unusually high or questionable claims, particularly for categories like travel, meals, or home office use.

Roberts warns: “Only claim expenses that are wholly and exclusively for business purposes. Keep receipts and be prepared to justify every claim. Inflated or unrealistic claims will put you under the microscope.”

Moderation, documentation and honesty in claims are essential practices for avoiding investigation triggers.

Significant Changes in Income or Profit

Sudden changes in declared income or profit margins can attract scrutiny, especially if they cannot be easily explained. Sharp declines or unexpected spikes can look suspicious without clear context.

“A sudden 50% drop in turnover without explanation will raise eyebrows,” notes Roberts. “Document any changes thoroughly, whether it’s losing a major client, increased competition or market factors. Providing evidence helps explain the figures.”

Being proactive in communicating the reasons behind financial fluctuations demonstrates good governance and reduces the risk of unnecessary investigations.

Staying One Step Ahead of HMRC in 2025 

Chris Roberts emphasises that many HMRC investigations arise from common, often unintentional mistakes. “An investigation doesn’t automatically mean wrongdoing, but it does involve stress, time and potentially professional fees to resolve,” he explains.

By understanding the key red flags – lifestyle discrepancies, cash-heavy operations, late or inaccurate filings, blurred personal and business finances, unrealistic expense claims and unexplained changes in income – individuals and businesses can take steps to remain compliant.

At the end of the day, awareness, meticulous record-keeping and professional guidance can prevent investigations and provide peace of mind as HMRC steps up its enforcement in 2025.