Is HMRC Watching Your Business? Here’s What Could Raise a Red Flag

When it comes to HMRC, it pays to stay under the radar — in the best way possible. While most businesses are never contacted by HMRC beyond the usual, there are a few habits and red flags that can draw unwanted attention. The good news? They're mostly avoidable with a bit of knowledge and some smart accounting.

Here are 8 common triggers that could put your business in the spotlight — and how to avoid them. 1. Big Fluctuations in Income or Expenses

HMRC expects your financial results to follow some level of consistency. Sudden drops or spikes in income, or unusually high expenses from one year to the next, can stand out — especially if there’s no explanation.

What to do:

If you’ve had a bad year (or a great one), document why. Was there a major contract win? A one-off cost? Poor trading conditions? Make sure your accountant knows, and include explanatory notes in your return if necessary.

Tip: Don’t try to “smooth” numbers to avoid suspicion. Transparency builds trust.

2. Too Many People Representing You

One red flag HMRC often looks for is if too many people are involved in representing you, either when dealing with your account or communicating with HMRC.

What to do:

Limit the number of people who handle your tax matters to ensure clarity and consistency in your records. Too many different people can cause mixed messages or discrepancies in the way your information is handled.

Caution: Avoid having multiple people from your team or advisors making decisions or contacting HMRC on your behalf. It can create confusion, and HMRC may question who is really in charge of your financial affairs.

3. Blurring the Line Between Business and Personal Expenses

It’s okay to claim a proportion of an expense if it genuinely serves both personal and business use (like a mobile phone or home internet). But mixing personal costs into your business expenses without logic can raise red flags.

What to do:

• Only claim the business-use portion of mixed expenses

• Ensure all receipts and bills are in your name or the company’s

• Always pay from a traceable account (not cash-in-hand)

Example: If your phone is 70% used for work, claim 70% of the bill. Keep a log if necessary.

4. Consistently Late Returns or Payments

Late filing or payment doesn’t just lead to penalties — it can make HMRC question how organised your business is.

What to do:

Set calendar reminders, use cloud-based accounting software, or let your accountant handle deadline tracking. Consistency shows professionalism.

Tip: Submit early if possible — it gives time to fix any issues.

5. Operating in Cash-Heavy Sectors

Running a cash-based business (like salons, takeaways, or market stalls) isn’t wrong — but it is viewed as higher risk for underreporting. HMRC pays closer attention to industries where income is harder to track.

What to do:

• Keep detailed daily cash logs

• Bank your takings regularly

• Use digital payments where possible to improve transparency

Tip: Avoid large unexplained cash deposits — always match them to sales.

6. Overseas Transactions or Accounts

Foreign income, investments, or bank accounts are fully legal — but they must be properly reported. HMRC now receives data from over 100 countries through the Common Reporting Standard (CRS), so omissions won’t go unnoticed.

What to do:

Report all overseas income, dividends, and assets

Get professional advice if you receive foreign payments or hold offshore accounts

Don’t wait for HMRC to find out — disclosure builds trust

Remember: You must declare foreign property rental income, too — even if it’s already taxed abroad.

7. Figures That Don’t Match Industry Norms

If your profit margins, turnover, or expenses look way off compared to similar businesses in your industry, it may trigger a closer look — especially if your reported profit is unusually low.

What to do:

Review your figures with your accountant. They can help benchmark your business and check for anything that might look unusual from HMRC’s point of view.

Example: A high-income consultancy firm reporting a loss every year might raise questions.

8. Big Turnover, Low Income — Where’s the Profit?

If your business is generating high revenue but showing very little (or no) profit, HMRC might wonder where the money is going. While this can be totally legitimate — especially in high-overhead sectors — it can still prompt questions.

What to do:

• Track all expenses carefully and be able to explain large outgoings

• Ensure director’s loans, salaries, or large supplier payments are clearly documented

• Regularly review margins with your accountant

Example: If you’re turning over £500,000/year but reporting £2,000 in profit, HMRC may ask why — and whether some income is being underreported or diverted.

Tip: Even if you reinvest profits back into the business, document it clearly in your accounts.

Final Advice

Being "on HMRC’s radar" doesn’t mean you're in trouble — but it does mean your numbers may raise questions. The best defence is honest, clear accounting, backed by professional advice.

If you’re unsure about any aspect of your business’s tax position, don’t leave it to guesswork. At 56 Accountancy, we help small businesses stay compliant, efficient, and audit-proof — so you can get back to growing your business. Tamara Kuzminska - 56 Accountancy