Category: HMRC Tax Investigations

An HMRC compliance check and a tax investigation are not always two separate procedures. “Compliance check” is HMRC’s broad term for checking a taxpayer’s position. It can range from a question about one figure to a detailed civil investigation. “Tax investigation” is often used to describe that investigative work, but the wording alone does not establish fraud or a criminal case.

If you have received a letter, the useful questions are what HMRC wants to examine, which taxes and periods are involved, what powers or procedure it is using and when you must respond. This guide compares the terms and explains how to assess your next step.

What is an HMRC compliance check?

HMRC uses compliance checks to establish whether a taxpayer’s tax position is correct. Its Compliance Handbook definition covers a wide range of activity, including short enquiries and detailed examinations across several years. Checks can concern a filed return, and some can take place before a return has been filed.

Examples include Self Assessment or Company Tax Return enquiries, VAT assurance visits and employer compliance reviews. HMRC’s list of check types makes clear that civil tax investigations sit within this wider range. A compliance check is therefore not a promise that the issue is minor.

What does “tax investigation” mean?

The term often describes an examination of transactions, returns or financial affairs. It may be used for a civil enquiry into an error as well as a more extensive investigation. HMRC’s guidance on checks explicitly includes investigations and enquiries within a check.

A criminal investigation is a separate matter. Read the actual notice rather than assuming that “investigation” always means a criminal allegation, or that “compliance check” excludes a serious issue.

Compliance check vs tax investigation: a practical comparison

This table compares how the terms are used. It does not create fixed legal categories; the notice and applicable procedure govern the case.

Why might HMRC contact you?

HMRC’s help and support guidance gives examples such as figures that appear incorrect or a large VAT refund claim compared with turnover. Those signals can prompt questions, but do not prove that the return is wrong. The word used for the check does not tell you why your case was selected.

For a fuller explanation of selection and risk signals, read what triggers an HMRC investigation. Keep the focus on the questions in your letter rather than guessing what HMRC might suspect.

What outcomes are possible?

A civil check can finish without an adjustment. If tax was overpaid, a repayment may follow. If too little tax was paid, HMRC may seek additional tax and interest, and a penalty may also arise. GOV.UK’s compliance-check guide explains these possible results.

Penalties are not automatic. The relevant rules and facts matter. For inaccuracies, HMRC’s penalty factsheet distinguishes reasonable care, carelessness and deliberate behaviour. No inaccuracy penalty is charged where reasonable care was taken, although that does not remove tax or interest properly due.

How should you respond to either type of letter?

1. Identify the scope: record the tax, periods, transactions and questions under review.
2. Record the deadline: separate a response date from any later review or appeal deadline.
3. Gather evidence: preserve the original records and organise the documents supporting your return.
4. Agree responsibilities: decide with your adviser who will prepare, approve and send the response.
5. Explain difficulties: raise missing records or the need for more time early, and confirm any extension.

Distinguish an informal request from a formal information or inspection notice. HMRC’s general factsheet explains its powers and safeguards. Seek advice about an unclear or disputed request rather than ignoring it.

Our HMRC investigation letter guide provides a more detailed first-response checklist. For VAT-specific requests, see our VAT investigation guide.

When does a case need specialist advice?

Get specialist advice promptly if the correspondence refers to suspected fraud, Code of Practice 9 (COP9), the Contractual Disclosure Facility or criminal investigation. These references matter more than a general heading.

COP9 is a civil investigation procedure for suspected fraud, with specific disclosure terms and consequences. It is not a criminal prosecution, and it is not the procedure used for every compliance check. HMRC advises recipients to obtain independent professional advice before responding to a disclosure offer.

Advice is also useful for disputed assessments, several taxes or periods, missing records or a technical point you cannot explain. If HMRC issues an appealable decision, follow the decision letter. Review and appeal routes vary by tax, with deadlines commonly of 30 days. Ongoing correspondence does not automatically extend them.

Frequently asked questions

Is a compliance check the same as a tax enquiry?

HMRC sometimes uses “tax enquiry” for a compliance check. A return enquiry can also have specific statutory rules, so check the procedure in the notice.

Should I be worried about a compliance check?

Take it seriously and respond in an organised way. The label alone does not show that HMRC has found an error or suspects fraud.

Does a tax investigation always mean a criminal case?

No. Investigations can be civil. A notice referring to criminal investigation requires advice appropriate to that procedure.

Can my accountant deal with HMRC?

Yes, with the appropriate authorisation. Give your adviser the complete notice and relevant facts; you remain responsible for accurate information.

How long does a compliance check take?

There is no single guaranteed duration. See our HMRC duration and time-limit guide for the difference between completion time, enquiry windows and assessment deadlines.

Should I keep filing returns while HMRC checks my tax?

Yes. An open check does not suspend normal filing and payment obligations. Raise any practical difficulties with your adviser and the officer.

Help understanding your HMRC correspondence

Apex Accountants can help you assess the notice, organise records and manage correspondence. Rana Zubair worked briefly within HMRC earlier in his career and has since gained many years of experience advising individuals and businesses through enquiries.

Learn about our HMRC tax investigation support, or book a consultation to discuss your letter and response deadline.

General guidance checked against the linked official sources on 6 October 2026. The notice, applicable tax rules and facts determine the procedure.

Inter-company lending has long been a practical solution for family-run businesses and owner-managed groups. These arrangements often support short-term funding, manage group cash flow, and facilitate internal investment. However, recent inter-company loans HMRC UK reviews have placed such transactions under increased scrutiny. HMRC is increasingly questioning whether such loans represent genuine commercial activity—or are being used to shift profits or obtain unintended tax advantages. With recent tax tribunal decisions and due to tightening legislation, companies can no longer afford to take a casual approach. At Apex Accountants, we recommend a thorough review of how inter-company loans are structured, recorded, and taxed within the framework of group company tax legislation.

Why Is HMRC Challenging Intercompany Loans?

Family-controlled companies frequently transfer funds between group entities to support trading operations or balance liquidity. But HMRC is questioning whether businesses are using these loans for genuine commercial purposes or to artificially generate tax benefits.

The issue lies in how these loans are treated for tax purposes—particularly when it comes to impairments, write-offs, and whether interest is deductible. These concerns are especially relevant for companies under common ownership, where one entity funds another within a closely held group. Inter-company loans tax implications UK guidance stresses that all such transactions must follow commercial logic to withstand review.

What Counts as “Connected” Under the Rules?

For corporation tax, “connected” companies have a defined meaning. CTA 2009 defines two entities as connected if:

• One company controls the other directly or through a chain of ownership, or
  
• Both companies are under the control of the same individual or individuals.
  

Unlike other tax definitions, this form of control does not include family attribution. For example, if a parent owns one company and their adult child owns another, HMRC may not treat them as connected under intercompany loan rules—unless both share control or make joint decisions.

This distinction is critical in deciding whether connected companies tax rules apply.

Tax-Neutral Write-Offs: Not Always So Simple

There’s a common assumption that loans between connected entities are automatically tax-neutral when forgiven. In simple terms, this would mean:

• The lender cannot claim a tax deduction for writing off the loan.
  
• The borrower is not taxed on the release of the debt.

However, this treatment only applies when the loan meets specific conditions:

1. The loan must qualify as a “money debt”—you must expect repayment in cash.
2. You must create the loan by actually lending funds, not by accumulating unpaid charges, goods, or services.

If either of these isn’t true, tax neutrality breaks down. The borrower may be taxed on the waived amount, and the lender might be denied relief. These consequences are a direct result of inter-company loans HMRC rules designed to prevent abuse.

The Risk of “Unallowable Purpose”

The unallowable purpose rule (CTA 2009, sections 441–442) enables HMRC to block tax deductions on interest or related expenses if the loan arrangement was motivated—even in part—by the intention of obtaining a tax advantage.

This test doesn’t just focus on individual transactions. Tribunals now consider the broader group context and commercial reasoning. Even if a loan had an operational use, if tax saving was a significant reason for the setup, deductions may be disallowed.

In the BlackRock and Kwik-Fit cases, HMRC successfully challenged intragroup lending where interest deductions were claimed while the underlying purpose appeared to be tax-driven rather than operational.

If you are relying on loans between HMRC connected companies, ensure they are not vulnerable under the unallowable purpose rule.

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Loan Write-Offs in Family-Owned Structures

Where a company writes off a loan to another under the same individual’s control but not within a formal corporate group, tax consequences can arise. In such cases:

• If the companies are part of a 100% UK group, a loan write-off is typically treated as tax-neutral and ignored for corporation tax.
  
• If not grouped, the waived loan may be considered a distribution to the shareholder in control.

Imagine Mr Ali owns both Company X and Company Y. If X writes off £15,000 lent to Y, and the companies are not in a group, HMRC may treat the deduction as if Mr Ali received a dividend personally. That could result in a personal tax bill at dividend rates—up to 39.35%—depending on his income level.

Where the corporation tax treatment of a write-off or related-company transaction is unclear, our corporation tax advisory services can help assess the position before the balance is released. 

This kind of scenario is increasingly being picked up under connected companies tax rules, especially when the loan wasn’t commercial or supported by proper agreements.

Director Loans: Beware of Sections 455 and 459

Section 455 CTA 2010 can apply where a close company lends money to a participator, typically a shareholder, or an associate of a participator. If the loan remains outstanding more than nine months after the end of the company’s corporation tax accounting period, the company may have to pay a Section 455 tax charge on the outstanding amount.

For loans made or benefits conferred on or after 6 April 2026, the Section 455 tax rate is 35.75%. The charge can generally be reclaimed after the loan is permanently repaid, although specific rules and time limits apply. HMRC’s director’s loans guidance also explains how loans to directors and shareholders are treated for tax and reporting purposes. 

Section 459 can also apply to certain indirect loan arrangements. For example:

• Company A makes a loan to Company B.
• As part of the same arrangements, Company B then provides funds or another benefit to a participator in Company A.

Where the statutory conditions are met, the arrangement can be treated as a loan to the participator for Section 455 purposes. This prevents close companies from avoiding the rules simply by routing funds through another person or company.s.

Impairment Losses and Accounting Standards

Under FRS 102 or IAS 39, businesses may recognise a reduction in the value of loans made to group companies. But if the loan is between connected companies, tax relief on the impairment is generally denied.

This restriction exists to stop groups from claiming relief twice—for example, once on a trading loss in the debtor company and again via an impairment in the creditor’s accounts.

Companies using fair value accounting for such loans must also switch to the amortised cost method for taxes. When the borrower and lender have a connection, this prevents volatile accounting valuations from affecting tax positions.

VAT Implications for Intercompany Charges

In the Tower Resources case, HMRC argued that management charges added to inter-company loan balances did not constitute VATable supplies, but the tribunal rejected this view.

Key lessons:

• Providing services to another company, even within a group, counts as a supply for VAT if consideration exists.
  
• Even if payment is deferred and recorded as a loan, output VAT may still be due.
  
• Input VAT can be recovered, assuming the services are for a taxable business activity.
  

For many businesses operating within related company structures, intercompany recharges should be carefully reviewed for VAT compliance.

Important Legal and Financial Considerations

Before forgiving any inter-company loan:

• Check distributable reserves. If the lender lacks sufficient reserves to write off the debt, the action could be deemed an unlawful distribution.
  
• Document intentions properly. If you never intended to repay the loan, it may not qualify as “money debt,” which removes the tax-neutral treatment.
  
• Use formal agreements and security where appropriate. With HMRC scrutiny increasing, well-structured documents can help prove business intent.
  

Common Pitfalls with Inter-Company Loans HMRC UK

• Lack of Documentation
  No formal loan agreements, undefined repayment terms, or missing board resolutions. Proper records are particularly important when dealing with inter-company loans HMRC UK scrutiny.
  
• Missing Reporting Requirements
  Loans made by a close company to participators may need to be disclosed with the company’s Corporation Tax return under the relevant Corporation Tax reporting for loans to participators requirements, so these balances should be identified and reported correctly.
  
• Misunderstanding ‘Control’
  Assuming companies are connected due to family ownership, even when control criteria are not legally met.
  
• Incorrect Accounting Treatment
  The application of fair value, rather than amortised cost, is crucial for tax compliance.
  
• Unallowable Purpose
  Loans are primarily structured for tax benefits rather than commercial reasons.
  
• Ignoring Distribution Rules
  Writing off balances without having sufficient reserves can lead to unlawful distributions and tax charges.
  

Summary: What You Need to Know About Inter-Company Loans Tax Implications UK

•  Not all loans between companies are automatically tax-neutral.
•  The unallowable purpose test can block deductions even when loans look legitimate.
•  Section 455 can apply even if director loans are routed through other companies.
• Inter-company recharges may still attract VAT liabilities.
•  Always follow HMRC rules on intercompany loans to prevent costly penalties.

Expert Support from Apex Accountants

Our team provides hands-on support for family businesses and group structures dealing with complex lending arrangements. Whether you’re looking for help managing tax risks in line with inter-company loans, preparing clear documentation, or reviewing historic balances, we’re here to help. 

From writing off group balances to navigating VAT and corporation tax, our expert advisors and tailored tax planning for family companies help keep your business compliant, tax-efficient, and well-prepared for HMRC scrutiny. If you would like professional advice on your current arrangements, you can contact Apex Accountants to discuss your position. 

Frequently Asked Questions 

What is Section 455 tax, and when does it apply to close company loans?

Under Section 455 of the Corporation Tax Act 2010, if a close company makes a loan to a director or shareholder (participator) that remains unpaid 9 months and 1 day after the accounting period end, the company must pay a 35.75% tax charge to HMRC. This tax is temporary and refundable once the loan is fully repaid, released or written off. 

What are HMRC’s ‘bed and breakfasting’ rules for loan repayments? 

Under Sections 464A–464D CTA 2010, HMRC prevents taxpayers from temporarily repaying a loan just before the 9‑month deadline and immediately reborrowing funds. If £5,000 or more is repaid and reborrowed within 30 days (or where there are arrangements to re‑borrow on larger loans), the repayment is matched against the new borrowing and Section 455 tax remains due. 

How should family companies structure inter-company loans to remain compliant?

Family businesses must execute formal loan agreements specifying commercial terms, repayment schedules, and market‑rate interest. For loans between connected companies, transfer pricing rules under TIOPA 2010 may apply if terms are non‑arm’s length. Maintaining clean director loan account (DLA) ledgers and professional accounting oversight prevents unexpected HMRC enquiries. 

 What happens if a director loan is written off by a family company?

If a family company writes off or releases a loan to a director‑shareholder, the written‑off amount is treated as a dividend distribution for income tax purposes under Section 415 ITTOIA 2005. The individual must report it on their self-assessment tax return and pay dividend tax; Class 1 National Insurance contributions do not normally arise on such distributions.