Receiving a letter from HMRC stating that tax has been underpaid can be unsettling. However, at this stage, it is usually the beginning of an enquiry rather than formal enforcement.
The way you respond can determine whether the matter is resolved proportionately or escalates into penalties, enforcement or insolvency proceedings.
Why has HMRC written to you?
HMRC may issue a letter about underpaid tax where:
• Returns appear incomplete or inconsistent
• Payments do not match declared liabilities
• Industry comparisons suggest discrepancies
• Information has been received from third parties
• A compliance review or enquiry has been opened
In some cases, the letter may refer to potential inaccuracies. In more serious cases, it may refer to suspected deliberate behaviour or avoidance arrangements.
The wording of the letter is important.
Does a letter mean you have done something wrong?
Not necessarily.
HMRC frequently issues “nudge” letters or information requests where there is uncertainty or incomplete data. In other cases, assessments may be raised where returns have not been filed.
An assessment is treated as legally due unless properly challenged. If the figure is incorrect, it must be disputed through the correct statutory route and supported by evidence.
Ignoring the letter allows HMRC to proceed on the basis of its own calculations.
What happens if you ignore the letter?
Failure to respond can lead to escalation.
HMRC may:
- Raise formal assessments
- Impose penalties and interest
- Issue enforcement notices
- Require VAT security
- Issue Personal Liability Notices
- Commence County Court proceedings
- Present a winding up petition (for companies)
- Present a bankruptcy petition (for individuals)
Early engagement usually prevents the need for enforcement action.
Can underpaid tax be negotiated?
In many cases, yes.
If the business remains viable but has fallen behind temporarily, HMRC may consider a Time to Pay arrangement. However, HMRC will expect full disclosure of financial information and realistic repayment proposals.
Where the liability itself is disputed, representations must be supported by accurate accounts and evidence.
Unrealistic promises or incomplete disclosure can damage credibility and accelerate escalation.
What about suspected avoidance or deliberate behaviour?
Where HMRC suspects avoidance arrangements or deliberate conduct, the tone of correspondence may be more formal.
Accelerated Payment Notices or formal information notices may be issued. In rare cases, criminal investigation is possible, but most matters are dealt with through civil penalty regimes.
Early legal advice is particularly important in these situations to ensure that responses are structured and proportionate.
Director risk considerations
For company directors, ignoring HMRC correspondence can increase personal exposure if the company later becomes insolvent.
Failure to file returns, continued trading while liabilities escalate and non-cooperation may be reviewed in any subsequent liquidation. This can lead to claims by liquidators or director disqualification proceedings.
Addressing issues at the enquiry stage significantly reduces that risk.
Act early to prevent escalation
A letter about underpaid tax is often the earliest warning sign in HMRC’s escalation process.
Handled promptly and properly, many cases are resolved without enforcement or insolvency proceedings. Ignored, they may progress to formal recovery action.
Understanding the stage you are at, and responding accordingly, is critical.
One of the most astute appointments I have ever made
A company director we successfully defended against disqualification
