Preparing for an audit is rarely anyone’s favourite job, but it is part of running a resilient, well-managed business.
HMRC is under continued pressure to close the tax gap. In 2024/25 alone, it completed around 316,000 compliance checks and has continued to invest heavily in new staff, data tools and digital systems.
Against that backdrop, audits and compliance checks are unlikely to fade away any time soon.
This guide explains what people usually mean by a “business audit”, why compliance matters more in 2025/26, and the practical steps you can take to make any audit or HMRC review as smooth and low-stress as possible.
Why audits and compliance matter more now
Small businesses now make up the largest share of the UK tax gap, around 60% in 2023/24. In most cases this comes down to errors, weak record keeping and a lack of reasonable care, rather than deliberate avoidance.
HMRC has responded by increasing both preventative activity, such as nudges and education, and traditional compliance checks. Preventative work now accounts for around 41% of compliance yield, helping drive total recoveries to an estimated £48bn in 2024/25.
For business owners, this means two things. There is a higher chance of being reviewed, and there is greater value in having strong systems, controls and documentation in place before anyone asks questions.
What do we mean by a “business audit”?
The word audit is often used loosely, but it can mean different things in practice.
Statutory financial audit
This is a regulated review of a company’s annual accounts under the Companies Act. Auditors assess whether the accounts give a true and fair view and comply with UK GAAP or IFRS.
HMRC compliance check or tax inquiry
This is a review of one or more taxes, such as corporation tax, VAT, PAYE or R&D relief. HMRC may ask for records, explanations and calculations, and can amend returns if errors are found.
Other audits and reviews
Lenders, investors, regulators or group companies may request their own reviews, ranging from limited procedures to full internal audits.
Most businesses are affected primarily by statutory audits and HMRC compliance checks, so that is the focus here.
Who needs a statutory audit?
For financial years beginning on or after 6 April 2025, a private limited company may qualify for audit exemption if it meets at least two of the following:
- Turnover of no more than £15m
- Assets of no more than £7.5m
- 50 or fewer employees
Even if these thresholds are met, an audit is still required if the company is public, carries out certain regulated activities, does not qualify for a group exemption, or falls into other specific categories.
It is also worth remembering that shareholders with at least 10% of shares can request an audit, and lenders or investors may require one as part of funding or due diligence.
HMRC compliance checks and what triggers them
HMRC compliance checks are now a routine part of the tax system. They range from simple letters to full reviews of records.
HMRC uses data matching and analytics to spot inconsistencies. Common triggers include:
- High director dividends relative to profits
- VAT returns that do not align with accounts or sector norms
- PAYE or CIS data suggesting employment status risks
- Large or unusual claims for reliefs such as R&D or capital allowances
A compliance check does not mean wrongdoing, but it does need to be handled carefully.
How the Autumn Budget shapes the compliance environment
The Autumn Budget 2025 did not change headline rates of income tax, VAT or corporation tax. The main corporation tax rate remains at 25%, and the VAT registration threshold stays at £90,000.
However, there are still important signals for compliance:
- Higher tax on dividend income from April 2026 may influence how profits are extracted and reviewed
- Continued focus on avoidance, phoenix arrangements and offshore structures
- Further investment in HMRC compliance and debt collection teams
In short, the rules themselves are relatively stable, but enforcement is becoming more active and better resourced.
Getting audit-ready before any review starts
Good preparation makes a real difference, whether you are facing a statutory audit, lender review or HMRC inquiry.
Keep complete, timely records
Use bookkeeping software that captures all transactions (we recommend Xero). Keep digital copies of contracts, invoices, payroll records and leases. Make sure you understand how VAT, PAYE and CIS figures flow from your records.
Reconcile regularly
At least quarterly, reconcile:
- Bank accounts
- Debtors and creditors
- VAT and PAYE submissions
- Stock and work in progress
Document judgments and estimates
Areas like revenue recognition, stock valuation and provisions involve judgement. Keep clear written explanations of assumptions and decisions.
Review director pay and dividends
Ensure salaries, benefits and dividends are properly approved, minuted and supported by vouchers and calculations.
Maintain clear tax working papers
Keep schedules showing how taxable profits, capital allowances and reliefs were calculated. This saves time and reduces friction if questions arise.
What to expect during a statutory audit
Most audits follow a familiar pattern:
- Planning and risk discussion
- Information requests and schedules
- Testing of transactions and balances
- Discussion of findings and adjustments
- Issue of the audit report and any management letter
Audits run more smoothly when responsibilities are clear, deadlines are realistic and communication stays open.
What to expect during an HMRC compliance check
HMRC usually starts with a letter setting out the scope, the information required and response deadlines. The check may focus on one issue or the whole return.
HMRC can usually go back four years for careless errors and up to 20 years for deliberate behaviour, depending on the tax and circumstances.
Checks may end with no change, an adjustment, penalties or a repayment. If you disagree, there are rights of review and appeal.
Prompt responses, clear evidence and good records all help keep the process manageable.
Ongoing habits that reduce audit risk
The same habits that make year end easier also reduce compliance risk:
- Annual internal “health checks” of accounts and tax
- Extra care in high-risk areas such as VAT, employment status and relief claims
- Up-to-date statutory books and Companies House filings
- Sensible segregation of duties where possible
- Regular training for finance and payroll staff
Final thoughts
The 2025/26 tax year sits in a period of stable rules but rising scrutiny. Audit thresholds have increased, but HMRC’s focus on small and mid-sized businesses continues to grow.
You cannot remove the possibility of an audit or inquiry, but you can control how prepared you are. Consistent records, clear documentation and regular reviews put you in a strong position if questions arise.
If you are unsure how the current rules or recent Budget announcements affect your business, it is far easier to address that before year end than during a live audit.
Preparing for an audit?
Our team at SeavorChartered can help you review your records, strengthen controls and approach any audit or compliance check with confidence. Contact us here.
