HMRC Audits in Construction: What Contractors Need to Know

🔹 Introduction

If you work in construction, your business is more likely than most to be selected for an HMRC audit. With CIS, VAT reverse charge, subcontractors, and project-based income, the sector is often seen by HMRC as high-risk for errors or non-compliance. Whether it’s a routine review or an in-depth tax investigation, this guide explains what an HMRC audit looks like, why contractors are targeted, and how to prepare your business to pass without penalties.

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🔹 What is an HMRC Audit?

An HMRC audit (or tax investigation) is a formal process where HMRC reviews your business records, returns, and processes to ensure your tax affairs are accurate. Types of audits:

• Random checks
• Triggered by CIS or VAT errors
• Response to a complaint or tip-off
• Follow-up from late filings or mismatches

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🔹 Why Construction Businesses Get Audited More

Reason	Explanation
CIS complexity	High potential for incorrect deductions
VAT reverse charge misunderstandings	Common source of errors or misapplication
Cash-heavy transactions	Difficult to trace if poorly recorded
Retentions and delayed payments	Mismatched revenue recognition
Mixed workforce (PAYE + CIS)	Often misclassified or under-reported

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🔹 Common Audit Triggers

• Incorrect or missing CIS returns
• VAT reclaim discrepancies
• Subcontractor paid without verification
• Unexplained large purchases
• Consistently late filings or inconsistent profits

💡 HMRC may audit up to 6 years of past returns—and 20 years in cases of fraud.

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🔹 What Happens During an Audit?

1. Notification Letter from HMRC
2. Request for documentation:
   • CIS returns
   • Payroll records
   • Invoices & receipts
   • VAT returns
   • Bank statements
3. Possible on-site visit or remote audit
4. Review meeting and questions
5. Final outcome:
   • No issues = closed
   • Errors = correction + penalties/interest
   • Serious issues = formal investigation or prosecution

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🔹 How to Prepare for an HMRC Audit

✅ Keep Digital Records Use software like Xero or QuickBooks to keep real-time records, especially for:

• Subcontractor payments (CIS)
• VAT filings
• Payroll and PAYE submissions

✅ Reconcile Accounts Monthly Match invoices, payments, bank entries, and returns regularly to spot errors early. ✅ Verify Subcontractors Keep proof of HMRC verification and CIS statements. ✅ Document Retentions and Work in Progress (WIP) Explain revenue recognition and include supporting evidence. ✅ Use a Construction-Specialist Accountant They’ll ensure returns are compliant with construction-specific rules.

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🔹 Tools That Help with Audit Readiness

• Xero or QuickBooks Online (full audit trail)
• BrightPay (CIS and payroll reports)
• AutoEntry or Dext (digitised receipts)
• Syft or Fathom (reporting and benchmarking)

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🔹 What If You’re Already Being Audited?

1. Don’t panic—cooperate professionally
2. Consult your accountant immediately
3. Don’t delay responses or ignore letters
4. Provide only what’s asked—but do it clearly
5. Keep records of all communications

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🔹 FAQs

How far back can HMRC look in an audit? Normally 4–6 years. If they suspect fraud, they can go back up to 20 years. Will they visit my site? Sometimes—especially if there are large discrepancies or if you operate on-site teams. What if I’ve made honest mistakes? HMRC may reduce penalties for voluntary disclosures and cooperation.

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🔚 Final Thoughts

HMRC audits are stressful—but with clean records, the right software, and support from a construction-specialist accountant, your business can pass without drama or disruption. Already been contacted by HMRC? Worried your business could be next? Contact us today to prepare or defend your business during an audit.