Running a nursery or childcare business takes energy, care, and organisation, and that includes staying on top of your finances. Alongside daily operations, you also need to make sure you’re meeting HMRC’s requirements.
HMRC inspections can happen at any time to check that your taxes are accurate, your records are in order, and your business is fully compliant. It might sound stressful, but with a bit of planning, it doesn’t have to be.
In this blog, we’ll walk you through what HMRC looks for, the types of checks they carry out, and how to prepare your childcare business for a smooth, stress-free inspection.
Why might HMRC inspect your nursery?
HMRC doesn’t randomly inspect every small business. There’s usually a reason — and it’s not always bad news.
Some common triggers include:
- Inconsistencies or errors in submitted tax returns
- Late filings or missed payments
- Large discrepancies between income and expenses
- Random selection (yes, it does happen!)
- Reports or whistleblowing from third parties
- Operating in a ‘high-risk’ sector, childcare often falls into this category due to frequent use of cash, government funding, and fluctuating income.
The best approach is to be proactive. Assume you could be inspected, and keep your financial house in order at all times.
Types of HMRC compliance checks
It’s useful to know the different types of compliance checks HMRC might carry out:
- Full enquiry: A complete review of your entire tax return or business accounts
- Aspect enquiry: A review of a specific part of your return (e.g., VAT or PAYE)
- Random check: No reason — just selected at random
- VAT check: Aimed at ensuring you’re charging and reclaiming VAT correctly (obviously nursery services are VAT exempt but you may have some services for which VAT applies)
- Employer compliance check: Focuses on PAYE, National Insurance, and employee records
- Self-employed business check: Looks at how you’re managing income, expenses, and bookkeeping
Your inspection letter will clarify which type of check is being conducted.
What does HMRC look for in a childcare business?
An HMRC inspector’s job is to make sure your business is following UK tax law. In a childcare setting, they’ll want to ensure:
- You’re declaring all income (cash, bank transfers, childcare vouchers, government funding)
- Your expenses are legitimate and supported by receipts
- You’re compliant with VAT (if applicable) and PAYE/NI for any employees
- You’re reporting accurately and not underpaying
- Your records are kept for at least 6 years (5 years after the latest income tax deadline)
- Business and personal finances are clearly separated
8 ways to prepare for an HMRC inspection
Getting organised now can save you stress later. Here are eight practical steps to help you feel confident — not caught off guard — if HMRC ever comes knocking.
1. Keep accurate, up-to-date financial records
Your records are your first line of defence. HMRC will want to see:
- Invoices to parents
- Payment records (cash, direct debit, online platforms)
- Expense receipts and supplier invoices
- Payroll and pension records
- Government funding details (e.g., 15/30 free hours)
Whether you use any accounting software or even spreadsheets, ensure your records are updated weekly, not once every quarter.
2. Separate business and personal finances
Especially for sole traders, separating accounts is essential. Use a dedicated business bank account and avoid using personal funds for business costs (or vice versa). This shows transparency.
3. Track all income sources
Childcare providers typically earn from:
- Private parent payments
- Government-funded free hours
- Local authority payments
- Tax-free childcare accounts
Record each income stream clearly and reconcile it to your bank account.
4. Claim expenses correctly
Only claim legitimate business expenses such as:
- Toys, books, learning materials
- Food and snacks
- Cleaning supplies
- Staff wages and training
- Rent, utilities, insurance
- Website and marketing costs
If you’re a home-based provider, apportion household bills fairly.
5. Stay on top of payroll and staff records
If you have employees, follow PAYE rules:
- Issue payslips and P60s/P45s
- Submit RTI reports
- Maintain contracts and onboarding docs
- Ensure correct wages, holiday, and sick pay
- Manage pension contributions
Payroll errors are a major trigger for HMRC checks.
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6. Be VAT-compliant (if applicable)
While most childcare services are VAT-exempt, extras like after-school clubs or meals may be taxable. If VAT-registered, ensure:
- The correct VAT rate is applied
- VAT returns are filed on time
- Digital records are kept under MTD rules
If in doubt, consult an accountant.
7. Maintain a clear audit trail
Every transaction should be traceable — this means:
- A supplier invoice
- A matching bank transaction
- An entry in your accounts
A strong audit trail reassures HMRC and prevents further digging.
8. Get professional support
The best way to stay inspection-ready is by working with a specialist accountant.
They can:
- Ensure accurate returns
- Help you claim all allowable expenses
- Guide you through VAT, PAYE, and MTD rules
- Represent you if HMRC contacts you
You can also authorise your accountant to deal with HMRC directly — they’ll act on your behalf during the inspection process.
What to do if you’re chosen for inspection
If HMRC selects your nursery for a check, don’t panic. Here’s what to do:
- Read the letter carefully — it will explain the scope of the check
- Respond professionally and within the deadline
- Gather the requested documents
- Inform your accountant immediately
- Be honest — if there are mistakes, own up and fix them
Inspections are typically resolved quickly when your records are in order. If HMRC needs more information, they may request additional evidence or visit your premises.
What happens after the inspection?
Once the check is complete, HMRC will inform you of the outcome. Possible results include:
- No issues found — no further action
- Minor corrections needed — small adjustments may be required
- Additional tax due — with potential penalties or interest
- Formal warning or penalty notice — for serious or repeated non-compliance
If you disagree with HMRC’s findings, you have the right to appeal or request a review of the decision.
Support available from HMRC
Not every childcare provider has an accountant. HMRC offers help too:
- Extra Support Team – for those with health, disability, or language barriers
- Webchat and phone assistance – accessible from gov.uk
- Appeals process – if you feel you’ve been treated unfairly
Conclusion
An HMRC inspection might seem stressful, but with organised records and the right support, it’s entirely manageable. As a childcare provider, you already juggle a lot — don’t let financial compliance add to the pressure.
Working with a specialist accountant ensures your nursery stays on track, avoids costly mistakes, and lets you focus on what truly matters: caring for the children.
Unsure if you’re inspection-ready?
We’re here to help. Contact us to get expert support tailored to your childcare business.
