If you made a mistake on your tax return ten years ago, there was always a chance it would never be spotted.

That wasn’t necessarily because HMRC lacked the information. More often than not, it simply didn’t have the time, technology or resources to compare everything it already held.

A property sale here, dividend income there, or company accounts filed separately from a personal tax return. Unless something obvious caught an inspector’s attention, many assumed those pieces of the puzzle would remain exactly that, separate pieces.

Today, that assumption is becoming increasingly risky.

HMRC recently revealed that its use of digital analytics and artificial intelligence (AI) helped recover or protect around £10 billion in tax during the last financial year. At the same time, the tax authority continues to target the UK’s estimated £59.2 billion tax gap – the difference between the amount of tax that should have been collected and what actually reached the Treasury.

Those figures are significant for one simple reason. They demonstrate that HMRC’s investment in technology is no longer a future ambition or an experimental project. It is delivering measurable results today.

The proof, as the saying goes, really is in the pudding. The conversation has moved on. The question is no longer whether HMRC can use AI effectively; it’s how much more effective it will become.

This doesn’t mean AI is replacing tax inspectors or that every taxpayer is suddenly under suspicion. Far from it. However, it does represent a significant shift in how HMRC identifies potential errors, inconsistencies and non-compliance. For businesses, company directors, landlords and individuals alike, understanding this change has never been more important.

From legacy systems to leading analytics

It might seem surprising that HMRC is now being talked about as a leader in data analytics.

After all, it wasn’t that long ago that the department was making headlines for ageing computer systems, lengthy telephone queues and delays in processing correspondence. We’ve previously written about HMRC’s legacy IT infrastructure and the challenges it created for both taxpayers and advisers.

Those systems haven’t disappeared overnight. However, while many taxpayers still experience frustration with HMRC’s customer service, something very different has been happening behind the scenes.

Rather than replacing every legacy system at once, HMRC has invested heavily in sophisticated analytical technology designed specifically to support compliance work. The result is an organisation that may still face operational challenges but has become significantly more capable of analysing data and identifying potential tax risks.

The irony is difficult to ignore. While taxpayers may still spend time waiting to speak to someone on the telephone, HMRC’s computers are becoming increasingly effective at spotting inconsistencies in the information they already hold.

Slow customer service and sophisticated analytics aren’t contradictory. They simply reflect two very different parts of the same organisation.

AI isn’t replacing tax inspectors

Artificial intelligence often attracts dramatic headlines, creating the impression that computers are making decisions about taxpayers without any human involvement. That isn’t what’s happening.

Instead, AI is best thought of as an exceptionally efficient research assistant. It doesn’t make decisions or accuse taxpayers of wrongdoing; it simply helps experienced investigators identify the cases that deserve a closer look.

Rather than determining whether someone has underpaid tax, these systems analyse vast quantities of information. This allows them to identify unusual patterns and highlight cases that may warrant further investigation. Experienced HMRC officers still make the decisions, but they are now supported by technology capable of reviewing millions of pieces of information far more quickly than any individual could.

One of the best-known examples is HMRC’s Connect system, which has been developed over many years to compare information from a wide range of legitimate sources. According to published figures, Connect supported around 540,000 tax enquiries during the 2024/25 tax year, demonstrating the central role data analysis plays in HMRC’s compliance activity.

AI isn’t looking for guilt; it’s looking for anomalies, and those anomalies help HMRC decide where questions should be asked.

Joining the dots like never before

Most people think about their financial affairs in separate compartments:

• Their accountant prepares the company accounts.
• Their solicitor handles a property purchase.
• Their investment manager issues annual tax certificates.
• Their bank manages their accounts.

Each organisation only sees part of the picture, while increasingly, HMRC can compare much more.

Information from Self Assessment tax returns, Corporation Tax returns, Companies House filings and Land Registry records. This also extends to investment income, overseas reporting agreements, online marketplaces, and, where appropriate, information obtained using HMRC’s legal powers, all of which can contribute to building a broader picture.

Viewed individually, none of this information is remarkable. The real power lies in comparing it.

Imagine a company director receives dividends from their business, sells an investment property and repays a director’s loan in the same tax year. None of those events is unusual individually. But if one source of information doesn’t align with another, modern analytics can identify the discrepancy far more quickly than was possible only a few years ago.

Individually, each piece of information tells a small part of the story. Together, they paint a much broader picture, and that’s exactly where AI excels.

It’s the inconsistencies that trigger questions

One of the biggest misconceptions about HMRC’s use of AI is that everyone is constantly being monitored. The reality is far more reassuring.

Most enquiries don’t begin because HMRC knows something is wrong. They begin because something doesn’t quite look right.

Technology helps identify unusual patterns that may deserve further investigation. These might include discrepancies between company filings and personal tax returns, unexplained director loan balances, undeclared rental income or financial activity that appears inconsistent with other information HMRC already holds.

Importantly, an enquiry does not automatically imply wrongdoing. There are many legitimate reasons why transactions may appear unusual at first glance, and genuine mistakes happen.

However, as HMRC’s analytical capabilities continue to improve, the likelihood of inconsistencies remaining unnoticed is steadily reducing.

Technology is only part of the picture

Artificial intelligence is just one element of HMRC’s wider compliance strategy.

The department is also making greater use of information-sharing agreements, expanding its legal powers to obtain financial information and strengthening incentives for whistleblowers to report serious tax evasion.

Under HMRC’s enhanced reward scheme, eligible informants whose information leads to the recovery of more than £1.5 million can receive between 15% and 30% of the additional tax recovered.

Alongside this, HMRC’s Fraud Investigation Service secured 260 criminal convictions during the 2025/26 tax year, underlining its continued focus on tackling serious tax fraud.

Taken together, these developments paint a clear picture. AI is not replacing traditional compliance activity, but it is making it more targeted, more efficient and increasingly data-driven.

Good records have never been more important

For taxpayers who keep accurate records and seek professional advice, these developments should not be a cause for concern. In many ways, they reinforce principles that have always represented good practice.

Business owners should ensure that director loan accounts are properly maintained, dividend decisions are fully documented, and company records accurately reflect transactions throughout the year. Landlords should retain comprehensive records of rental income and allowable expenses, while individuals should ensure tax returns are prepared using complete and accurate information.

A sensible compliance health check

As HMRC’s analytical capabilities continue to evolve, it’s worth asking yourself a few simple questions:

• Are your company records accurate and up to date?
• Do director loan accounts reconcile correctly?
• Are dividend payments properly documented?
• Have all property income sources been declared?
• Could significant transactions be easily explained if HMRC asked questions?

If the answer to any of these is “I’m not sure”, now is the time to review them – not after an enquiry arrives.

Good bookkeeping has always mattered. Today, it matters even more because technology makes inconsistencies easier to identify. Well-maintained records don’t just help you comply with your obligations; they make responding to any HMRC enquiry significantly quicker and less stressful.

Looking Ahead

Artificial intelligence is transforming almost every industry, and tax administration is no exception. 

For years, many assumed HMRC simply lacked the technology to connect every piece of financial information it already held. Recent evidence suggests that assumption is becoming outdated.

The proof is no longer theoretical. HMRC’s own figures show that investment in AI and digital analytics is delivering tangible results, helping recover billions of pounds in tax while allowing compliance teams to focus their efforts more effectively.

For most taxpayers, this isn’t a reason to panic. It is, however, a timely reminder that accurate records, consistent reporting and proactive tax advice have never been more valuable.

The best tax strategy has never been trying to stay below the radar. It’s making sure there’s nothing for the radar to find.

As HMRC continues to expand its use of AI and data analytics, ensuring your tax affairs are accurate, consistent and well-documented has never been more important. Whether you’re a business owner, company director, landlord or individual taxpayer, the team at Wilkins Southworth can help you review your tax affairs and ensure they’re prepared for an increasingly data-driven compliance environment. 

If you’d like to discuss your circumstances, we’d be delighted to help.

For many businesses, paying HMRC is a straightforward part of the monthly routine. Calculate the liability, make the payment before the deadline and move on to running the business.

That process, however, could soon look rather different.

HMRC is consulting on proposals that would require most VAT and PAYE payments to be made by direct debit, replacing the wide range of payment methods currently used by businesses. 

If implemented, the changes would affect around 2.4 million businesses, sole traders and employers. More significantly, HMRC is also considering penalties for businesses that fail to pay by the required method, even where the correct amount of tax has been paid on time.

While the consultation focuses on VAT and PAYE, it also offers another indication of the direction HMRC is taking as it continues to digitise the UK’s tax system. 

Why HMRC Direct Debit could become mandatory

The proposed HMRC Direct Debit rules form part of a wider consultation published by HMRC in June 2026. At present, businesses can settle VAT and PAYE liabilities using various payment methods, including bank transfers, debit cards, standing orders and, in some cases, cheques. Despite HMRC encouraging direct debit as its preferred payment option, relatively few businesses have adopted it.

According to HMRC, only around 330,000 of the 2.73 million businesses registered for VAT or PAYE currently pay by direct debit. The remaining 2.4 million continue to use alternative methods.

HMRC believes mandatory direct debit would:

• reduce administrative work for businesses and HMRC
• minimise payment reference errors
• reduce incorrectly allocated payments
• lower the number of late payments
• improve overall compliance.

From HMRC’s perspective, the proposal represents a logical extension of the digital systems already introduced through initiatives such as Making Tax Digital.

A wider move towards digital tax administration

Viewed in isolation, changing the way businesses pay VAT and PAYE may appear relatively minor. In reality, it forms part of a much broader programme of digital reform.

Over the past decade, HMRC has steadily moved towards a more automated tax system:

• digital record keeping
• online taxpayer accounts
• Making Tax Digital 

Together with expanded information-gathering powers, they all demonstrate a clear direction of travel. 

The proposal also sits alongside HMRC’s plans to replace certain paper-based VAT processes with online services, reinforcing the department’s wider move towards digital tax administration. 

Rather than relying on businesses to initiate each VAT or PAYE payment manually, HMRC would collect amounts automatically through an authorised Direct Debit once the relevant return has been submitted. HMRC believes this will reduce manual intervention and help minimise incorrectly allocated payments. 

For businesses already paying by direct debit, little is likely to change. For many others, however, it would require adjustments to existing payment processes and internal controls.

What would the new rules mean in practice?

Under the proposals, businesses would authorise HMRC to collect VAT and PAYE liabilities directly from their bank account. 

Once a VAT return has been submitted, HMRC would notify the business of the amount due and collect payment three working days after the normal payment deadline. The consultation recognises that some businesses will still require alternative arrangements.

For example:

• businesses making payments exceeding the £20 million Bacs direct debit limit would continue using other electronic payment methods
• overseas businesses without UK bank accounts would remain outside the proposed rules
• certain other limited exceptions may apply following consultation

For the vast majority of businesses, however, direct debit would become the default method of payment.

The proposal that has attracted the most attention

Perhaps the most surprising aspect of the consultation is not the move towards direct debit itself, but the potential consequences of failing to use it.

HMRC is seeking views on whether businesses should face penalties if they fail to pay by direct debit, even where the correct amount of VAT or PAYE has been paid in full and by the due date.

The consultation also considers whether certain payment deadline extensions should only remain available to businesses paying by direct debit.

At this stage, these are proposals rather than confirmed policy. Nevertheless, they illustrate how the payment method could become an increasingly important aspect of tax compliance rather than simply an administrative choice.

Businesses should remember that the consultation is seeking views on these changes. No decisions have yet been made regarding the introduction of mandatory direct debit or any associated penalties.

There could be benefits for businesses

While some businesses may view mandatory direct debit as reducing flexibility, there are potential advantages. 

Automated payments may reduce the risk of:

• missed payment deadlines
• incorrectly entered payment references
• payments allocated to the wrong tax period
• avoidable late payment penalties.

For businesses with established accounting systems and predictable cash flow, automation may actually simplify routine tax compliance.

As with many digital reforms, much will depend on how the final rules are implemented and whether sufficient flexibility remains for businesses with more complex payment arrangements.

Other VAT changes are also on the way

The consultation is not limited to payment methods. HMRC also plans to replace paper-based VAT forms with new online submission tools by the end of 2026.  

While less high-profile than the direct debit proposals, these changes reinforce HMRC’s wider objective of replacing paper-based administration with fully digital services wherever possible.

Taken together, the proposals suggest that businesses should expect further digital changes over the coming years rather than viewing this consultation as a one-off initiative.

What should businesses do now?

There is no immediate need for businesses to change how they pay HMRC. The consultation remains open until 16 August 2026, and the proposals may evolve before any legislation is introduced.

However, businesses that currently pay VAT or PAYE by bank transfer or other manual methods may wish to consider how mandatory HMRC Direct Debit payments could affect their existing financial procedures, cash flow management and internal approval processes.

Speaking to your accountant before any changes are introduced can help ensure you understand both the practical implications and any opportunities to simplify your tax administration.

Conclusion

The proposal to mandate HMRC Direct Debit for VAT and PAYE payments may appear to be a relatively small administrative change. In reality, it reflects a much broader shift in the way HMRC interacts with businesses.

Whether or not the changes proceed in their current form, the direction of travel is becoming increasingly clear. HMRC continues to automate more aspects of tax administration, from record keeping and reporting through to the way taxes are ultimately collected.

With almost 87% of VAT and PAYE-registered businesses currently using payment methods other than direct debit, this would represent one of the biggest administrative changes to business tax payments in recent years.

For businesses, understanding these developments early will make any future transition far easier. If you’d like to discuss how these proposals could affect your business or your wider tax compliance procedures, the team at Wilkins Southworth would be pleased to help.

Imagine paying £1.6 million in tax, only to find yourself facing a potential penalty of almost £460,000 because HMRC believes you failed to take reasonable care after your accountant submitted the wrong figures. 

It sounds extraordinary, but situations like this are becoming increasingly common as HM Revenue & Customs (HMRC) strengthens its compliance activity and places greater emphasis on taxpayer behaviour rather than simply identifying errors.

It’s Easy to Assume

Most people assume that once they’ve appointed a qualified accountant, responsibility for preparing an accurate tax return rests entirely with that adviser. It’s an understandable assumption because that’s precisely why professionals are engaged. 

The law, though, takes a slightly different view. While accountants prepare returns and provide advice, taxpayers remain responsible for the declarations they sign.

That doesn’t mean every professional mistake automatically becomes the taxpayer’s fault, but it does mean HMRC will often ask a different question when inaccuracies are discovered: did the taxpayer take reasonable care?

The answer can determine whether an enquiry ends with a straightforward correction to a tax return or a substantial financial penalty.

Understanding the HMRC Reasonable Care Standard

The phrase HMRC reasonable care appears regularly in tax legislation and HMRC guidance, yet it is often misunderstood.

Reasonable care does not require taxpayers to become tax experts or guarantee that every figure on a return is correct. Instead, it asks a much simpler question: what would a prudent and reasonable person have done in the same circumstances?

The answer will rarely be identical for every taxpayer. Someone completing a straightforward Self Assessment return will not be judged in exactly the same way as the owner of a group of companies or an individual with complex investment or overseas income. 

HMRC recognises that people have different levels of knowledge and that many will rely on professional advice.

Schedule 24 Finance Act 2007 focuses on behaviour rather than simply identifying mistakes. Broadly speaking, inaccuracies fall into three categories:

• reasonable care has been taken
• careless behaviour
• deliberate, or deliberate and concealed, behaviour

The financial consequences increase significantly as behaviour becomes more serious.

This distinction matters because two taxpayers could submit almost identical incorrect tax returns and receive completely different outcomes. One may simply be asked to correct the position, while the other could face an HMRC penalty for an inaccurate tax return. 

The difference often comes down to the steps they took before submitting the return.

Can You Rely on Professional Advice?

This is where many taxpayers become uncertain. If an accountant makes a mistake, surely the accountant should be responsible?

In practice, the answer isn’t always as straightforward as people expect.

Signing a tax return is more than an administrative exercise. It is a formal declaration that, to the best of your knowledge, the information is complete and accurate. At the same time, the law recognises that tax legislation has become increasingly complex and that taxpayers are entitled to seek advice from suitably qualified professionals.

HMRC’s own guidance recognises that seeking appropriate professional advice can form part of demonstrating reasonable care, provided the taxpayer also supplies complete and accurate information. 

That doesn’t mean taxpayers can simply hand over paperwork and forget about it. Reasonable reliance on professional advice is very different from blind reliance. If an adviser requests information that is never provided, or if figures on a return are clearly inconsistent and no questions are asked, HMRC may conclude that the taxpayer has failed to meet their obligations.

On the other hand, appointing an experienced Chartered Accountant, answering questions honestly, supplying all relevant information and raising concerns where something appears incorrect are all factors that support a reasonable care defence.

It’s a subtle distinction, but an important one. Taxpayers are not expected to know every detail of UK tax legislation, but they are expected to behave reasonably throughout the process.

When a Genuine Mistake Became a Serious HMRC Enquiry

A recent Wilkins Southworth case illustrates how these principles work in practice.

The story began when a client approached us after their previous accountant had submitted an incorrect tax return. The client did exactly what most people would do. They reviewed the return, spotted errors and asked their accountant to correct them. Unfortunately, the amended return also contained significant inaccuracies.

Although the client had already paid approximately £1.6 million in tax, the amended return incorrectly showed a liability of just over £65,000.

From HMRC’s perspective, this was far more than a minor discrepancy. Had the amended return been accepted without question, it could have resulted in a repayment of approximately £1.55 million, together with interest. Unsurprisingly, HMRC opened an enquiry and argued that the taxpayer had behaved carelessly.

Under Schedule 24 of the Finance Act 2007, the proposed penalty approached £460,000.

At first glance, HMRC’s position was understandable, given that the figures were plainly wrong. The real issue, however, wasn’t the existence of an inaccurate tax return but whether those inaccuracies resulted from careless behaviour by the taxpayer.

Our defence focused almost entirely on that question.

The client had appointed a Chartered Accountant, supplied the necessary information, and, when they identified errors in the original return, immediately raised those concerns with their adviser and asked for them to be corrected. In other words, they had behaved exactly as a prudent taxpayer might reasonably be expected to behave.

Applying the principles behind HMRC reasonable care, we argued that our client had taken appropriate steps to meet their obligations and could not reasonably be expected to identify every technical error made by a professional adviser.

Following detailed representations, HMRC accepted that our client had taken reasonable care and withdrew the proposed penalty. 

Why More Taxpayers Could Face This Situation

This case is far from unique. It reflects a broader shift in the way HMRC approaches compliance.

Digital reporting, improved data matching and greater access to financial information mean discrepancies are identified much more quickly than they were a decade ago. Initiatives such as Making Tax Digital are also changing the relationship between taxpayers and HMRC, allowing compliance checks to become more targeted and efficient.

As a result, enquiries increasingly focus on behaviour as well as the figures themselves.

We regularly meet clients who assume that engaging an accountant transfers all responsibility to the adviser. That’s understandable, but it isn’t how the legislation works. Professional advice helps taxpayers meet their obligations; it doesn’t replace those obligations altogether.

Reviewing returns before signing them, keeping accurate records and asking questions when something doesn’t look right are more than sensible habits. If HMRC later opens a compliance check, they may also become valuable evidence that you exercised reasonable care.

Demonstrating Reasonable Care

No accountant can promise that mistakes will never happen. Tax legislation changes regularly, HMRC guidance evolves, and even experienced professionals sometimes disagree on how complex rules should be interpreted.

What taxpayers can control is how they approach their own responsibilities.

Choosing an appropriately qualified adviser is the obvious starting point. Beyond that, providing complete information, retaining supporting records, reading tax returns before signing them and questioning figures that appear inconsistent all help demonstrate responsible behaviour.

These aren’t onerous requirements. They’re simply the practical steps that any prudent taxpayer would normally be expected to take.

Final Thoughts

Mistakes happen, particularly in an area as complex as UK tax legislation. The purpose of the penalty regime isn’t to punish every inaccuracy; it’s to distinguish between taxpayers who have acted responsibly and those who have failed to meet the standards expected of them.

The difference between reasonable care and careless behaviour isn’t always measured by what went wrong. More often, it’s measured by what the taxpayer did before anything went wrong.

The recent Wilkins Southworth case demonstrates that these principles are far more than legal theory. They can have significant financial consequences when HMRC opens an enquiry or considers penalties for inaccuracies in tax returns.

Understanding HMRC reasonable care isn’t simply a technical issue for accountants. It affects every taxpayer who signs a tax return and expects professional advice to protect their interests. As this case demonstrates, the difference between reasonable care and careless behaviour can have significant financial consequences. 

If HMRC has opened an enquiry into your tax affairs or you’re concerned about a potential Schedule 24 penalty, contact the team at Wilkins Southworth for clear, practical advice tailored to your circumstances. 

A cancelled flight, an overnight airport hotel and a few days spent travelling between overseas destinations would not strike most people as particularly significant tax events. Yet in a recent First-tier Tribunal case, those seemingly routine travel arrangements were enough to determine whether an individual remained non-resident for UK tax purposes.

The decision in Parker v HMRC considered two aspects of the Statutory Residence Test that frequently arise in practice: the transit exemption and exceptional circumstances. While the facts involved an engineer working overseas, the judgment provides useful guidance for anyone whose residence position depends on carefully managing the number of days spent in the UK.

The outcome was far from academic. Had HMRC succeeded, the taxpayer would have become a UK resident and faced an additional tax liability of almost £65,000.

Why a handful of days can matter

The Statutory Residence Test determines whether an individual is resident in the UK for tax purposes. Although the rules are detailed, many residence disputes ultimately come down to day counts and whether particular days should be included or excluded.

For those working abroad, even a small increase in UK days can have significant consequences. Residence status may affect not only employment income but also overseas investments, rental income, capital gains and wider reporting obligations.

In Mr Parker’s case, the difference of 4 days between 89 and 93 days in the UK determined the outcome.

HMRC accepted that he had been present in the UK at midnight on 100 occasions during the relevant tax year. Seven of those days were disregarded because of Covid-related provisions. The remaining dispute centred on four days: three involving transit through Heathrow Airport and one arising from a flight cancellation caused by severe weather.

The transit day dispute

The legislation contains an exemption designed to prevent individuals from being treated as spending a day in the UK simply because they are travelling through it on an international journey.

Mr Parker worked in Iraq and travelled extensively between overseas locations. On several occasions, he arrived at Heathrow Airport, stayed overnight in a nearby hotel and departed the following day for another destination outside the UK.

HMRC argued that the exemption should not apply because the various flights had been booked separately. In its view, each journey ended when Mr Parker arrived in the UK, and a new journey began when he departed.

The Tribunal was unconvinced.

The judges described the distinction between through-tickets and separately booked flights as arbitrary, noting that nothing in the legislation required a journey to be booked on a single ticket for the transit exemption to apply. Mr Parker’s explanation was straightforward: separate bookings were often cheaper and easier to arrange. The Tribunal accepted that practical reality.

The decision will be welcomed by many people who travel internationally. Modern travel arrangements are rarely designed around tax rules and are more likely to reflect airline pricing, availability and convenience. The Tribunal’s willingness to focus on the substance of the journey rather than the booking structure suggests a more pragmatic approach than HMRC’s interpretation.

The case also raised an interesting question about family contact during transit.

On some of the journeys, Mr Parker met his wife and stepdaughter because they were travelling onwards with him. HMRC argued that these meetings represented activities unrelated to his passage through the UK and therefore prevented the exemption from applying.

Again, the Tribunal disagreed. It found that meeting family members who were joining the same journey was fundamentally different from travelling into the UK to spend time with family or friends. Mr Parker remained within the airport environment, staying at an airport hotel and travelling between the hotel and Heathrow. The judges concluded that these activities remained closely connected to his onward travel and did not undermine the transit exemption.

Exceptional circumstances and cancelled flights

The second issue arose on 29 February 2020 when Mr Parker boarded a British Airways flight from Heathrow to Dublin.

Before departure, severe weather associated with Storm Jorge caused Dublin Airport to close. The flight was cancelled, passengers were required to disembark, and British Airways arranged hotel accommodation before rebooking them on flights the following day.

The Statutory Residence Test allows certain days to be ignored where exceptional circumstances beyond an individual’s control prevent them from leaving the UK.

HMRC argued that flight disruption is a normal feature of international travel and that alternative arrangements may have been available. The Tribunal took a different view.

While poor weather itself may not be unusual, the judges looked at the overall circumstances rather than focusing on a single factor. Dublin Airport had been forced to close, flights were being cancelled, diverted and delayed, and widespread disruption affected travellers throughout the day. Viewed as a whole, the circumstances were not routine and were capable of being exceptional.

Perhaps the most significant part of the judgment was the Tribunal’s focus on practical reality.

Mr Parker had already boarded the aircraft when the flight was cancelled. His luggage remained with the airline, and British Airways had arranged replacement travel for the following morning. HMRC suggested he could have explored alternative routes out of the UK, but the Tribunal considered that expectation unrealistic in the circumstances.

The judges concluded that the correct question was not whether some theoretical route out of the UK might have existed, but whether Mr Parker was realistically able to leave the country that day. On the facts, he was not. By accepting the airline’s arrangements and departing on the next available flight, he had left as soon as circumstances genuinely permitted.

Wider lessons from the decision

Although the case concerned one taxpayer’s residence position, the principles are likely to have wider relevance.

International travel has become increasingly vulnerable to disruption, whether from severe weather, industrial action, technical failures or operational issues. For individuals whose residence position depends on remaining below particular day-count thresholds, unexpected events can quickly become significant.

The case also demonstrates the importance of maintaining detailed records. Throughout the dispute, evidence such as boarding passes, hotel invoices, travel confirmations and flight information played an important role in establishing the facts.

Residence enquiries often begin years after the relevant tax year has ended. What seems obvious at the time can be surprisingly difficult to reconstruct later. Keeping comprehensive travel records may prove invaluable if HMRC subsequently questions a residence position.

Conclusion

The Parker decision provides welcome clarification on two areas of the Statutory Residence Test that regularly create uncertainty. The Tribunal rejected HMRC’s narrow interpretation of the transit exemption and adopted a practical approach when assessing exceptional circumstances, focusing on the realities of international travel rather than artificial distinctions or hypothetical alternatives.

Residence disputes rarely arise because someone deliberately ignored the rules. More often, they stem from travel arrangements, unexpected disruption and the practical realities of modern working life. The Parker case is a reminder that a handful of days can sometimes determine a tax position worth many thousands of pounds.

At Wilkins Southworth, we advise individuals and families on UK residence, overseas work arrangements and international tax planning. If you would like to discuss your residence position or review how the Statutory Residence Test applies to your circumstances, please contact our team.

The abolition of the remittance basis from April 2025 represented one of the biggest changes to UK international tax rules in decades. The reforms form part of the wider non-dom tax changes introduced from April 2025. 

Recently, much of the discussion surrounding the reforms has focused on the four-year Foreign Income and Gains (FIG) relief available to qualifying new residents arriving in the UK. However, what has received far less attention is the reporting side of the regime.

Under the previous remittance basis system, offshore income and gains often remained outside HMRC reporting requirements if they were not brought into the UK. For many internationally mobile individuals, particularly those with offshore investment portfolios or overseas property interests, the regime offered a degree of privacy alongside tax efficiency.

As we now know, the foreign income and gains relief system operates very differently. 

While the new rules may still provide valuable relief for qualifying individuals, HMRC’s disclosure expectations are now significantly greater than under the old regime. In many cases, clients fully appreciate this only when they begin preparing their first tax return under the new rules.

Background to the foreign income and gains relief rules 

The foreign income and gains relief regime was introduced from 6 April 2025 alongside the abolition of the remittance basis of taxation. Broadly speaking, the UK has moved away from a domicile-based system towards one that is far more heavily based on residence.

Under the new framework, qualifying new residents may claim relief on certain foreign income and gains arising during their first four years of UK residence. To qualify, an individual must generally have been a non-UK resident for at least 10 consecutive tax years before becoming a UK resident again.

Where relief applies, qualifying foreign income and gains can usually be brought into the UK without an additional UK tax charge. That remains one of the more attractive features of the regime for internationally mobile individuals and families relocating to the UK.

At first glance, the rules may appear relatively straightforward. In practice, however, the compliance and reporting obligations are considerably more detailed than many clients expect.

The major change: Worldwide reporting and disclosure

The most significant practical difference between the old remittance basis and the FIG regime is the level of disclosure.

Under the remittance basis, foreign income and gains that remained offshore often did not need to be fully reported to HMRC. For many non-domiciled individuals, this created a relatively contained reporting environment, particularly where offshore income was retained outside the UK.

The FIG regime changes that position considerably.

Foreign income and gains generally need to be identified and reported as part of the UK Self Assessment process where relief is claimed, even where no UK tax ultimately becomes payable. Claims are also made on a source-by-source basis rather than through a broad exemption mechanism.

In practical terms, this may involve reporting:

• Overseas bank interest
• Foreign dividends
• Offshore investment portfolio income
• Rental income from overseas properties
• Gains on foreign share disposals
• Certain trust distributions

For clients with multiple accounts, investment platforms or international structures, the reporting exercise can become significantly more detailed than under the previous regime.

Importantly, the relief itself may remove the UK tax charge, but it does not remove the reporting requirement. That distinction is becoming increasingly important.

Many offshore structures and investment arrangements were originally established during a period when disclosure expectations were materially lower. The UK tax system has now moved much closer towards full transparency of overseas income and gains.

Why this matters more than some clients realise

The practical challenges posed by the FIG regime are not always obvious at first. 

Many internationally mobile individuals have historically organised their affairs around the old remittance basis rules. As a result, records, investment structures and reporting systems may not have been designed with detailed UK disclosure requirements in mind.

This can create difficulties where individuals now need to:

• Identify multiple offshore income sources
• Separate different categories of foreign income and gains
• Reconcile overseas reporting periods with UK tax years
• Calculate foreign currency conversions accurately
• Coordinate information between advisers across several jurisdictions

Some clients may incorrectly assume that if foreign income is exempt from UK tax under the FIG regime, there is nothing to report. Under the new system, that assumption can quickly create problems.

At the same time, HMRC continues to expand its focus on offshore compliance and international reporting consistency. The department already receives large volumes of overseas financial information through international information-sharing agreements and increasingly uses digital analysis to identify inconsistencies between returns, accounts and offshore data.

This wider direction of travel is difficult to ignore. The UK tax system has become far more transparent in recent years, particularly regarding offshore wealth and international structures.

The wider planning implications

Although the FIG regime offers valuable planning opportunities in certain situations, making a claim is not always as straightforward as many clients initially assume. A FIG claim can affect several allowances and reliefs, including:

• Personal allowance entitlement
• Capital gains tax annual exempt amount
• Certain foreign losses
• Relief for finance costs relating to overseas property income

The position can become more complicated where clients have multiple sources of foreign income or gains, or where overseas tax rules interact with UK reporting obligations.

In some situations, a partial claim may prove more beneficial than claiming relief on every source of foreign income. In others, the administrative burden associated with reporting may itself become a significant consideration.

Coordination between UK advisers and overseas professionals is also becoming increasingly important, particularly for clients with:

• International investment portfolios
• Overseas businesses
• Trusts
• Foreign property holdings
• Family wealth structures spanning several jurisdictions

The regime is not simply a “claim and forget” exercise. Ongoing review is likely to become increasingly important as HMRC guidance and international reporting standards continue to develop.

Which clients are most likely to be affected?

The FIG regime is particularly relevant for:

• Non-doms previously using the remittance basis
• Returning UK residents
• Internationally mobile executives
• Entrepreneurs relocating to the UK
• Offshore investors
• Clients with overseas property portfolios
• Beneficiaries of offshore trusts

Even relatively straightforward offshore arrangements may now involve a much greater degree of reporting analysis and disclosure than under the previous system. For some clients, the compliance burden may ultimately outweigh the immediate UK tax exposure.

Conclusion

Foreign income and gains relief still offers potentially valuable opportunities for qualifying new residents arriving in the UK. However, the reporting framework surrounding offshore income and gains has changed considerably since the abolition of the remittance basis.

The days of relatively limited offshore disclosure have largely disappeared. Transparency, reporting accuracy and international information sharing now sit much closer to the centre of the UK international tax system.

For internationally mobile individuals, effective planning increasingly involves not only managing tax exposure, but also ensuring offshore reporting is complete, consistent and properly documented.

At Wilkins Southworth, we advise internationally mobile individuals and families on offshore reporting, residence issues and wider international tax planning. If you would like to discuss how the FIG regime may affect your circumstances, please feel free to contact our team.

HMRC has suffered another defeat in one of the UK’s longest-running employment status disputes.

In May 2026, the tribunal again ruled that football referees engaged by Professional Game Match Officials Limited (PGMOL) were self-employed rather than employees for tax purposes. The dispute, involving around £584,000 in tax liabilities, has now been running for almost a decade.

Although the case centres on professional football referees, the underlying issues affect thousands of UK businesses. Construction firms, consultants, IT companies and property businesses all rely heavily on contractors and self-employed workers. The same employment status rules apply across all of them.

That is what makes the PGMOL case so significant. Even after years of litigation, HMRC and the courts still reached very different conclusions on how the arrangements should be treated.

Background to the Employment Status Dispute

The case involved referees engaged by PGMOL between 2014 and 2016. HMRC argued the officials should have been treated as employees, meaning PAYE and National Insurance should have been deducted.

PGMOL maintained that the referees were self-employed because appointments were accepted individually, with no obligation to provide or accept ongoing work.

This type of dispute is far from unusual. Employment status remains one of the most heavily contested areas of UK tax law, particularly since the IR35 reforms increased scrutiny of contractor arrangements.

The financial consequences can be severe. Businesses found to have incorrectly treated workers as self-employed may face liabilities for unpaid PAYE, National Insurance, interest and penalties stretching back several years.

Timeline of the employment status case

The dispute has moved through several courts and tribunals:-

• August 2018 – The First-tier Tribunal ruled the referees were self-employed.
• May 2020 – The Upper Tribunal dismissed HMRC’s appeal.
• September 2021 – The Court of Appeal referred the matter back for reconsideration.
• September 2024 – The Supreme Court clarified aspects of the legal framework surrounding employment status assessments.
• May 2026 – The tribunal again ruled the referees were self-employed.

HMRC is reportedly considering whether to appeal again.

The length of the case highlights the wider problem facing businesses. Employment status disputes can take years to resolve, creating prolonged uncertainty and significant professional costs.

Why HMRC lost the employment status case

Employment status cases are rarely decided on a single factor. Courts normally assess the overall working relationship rather than relying solely on contractual wording.

Several key tests are usually considered:-

• the degree of control
• mutuality of obligation
• personal service requirements
• financial risk
• independence

In the PGMOL case, the tribunal focused heavily on the absence of guaranteed ongoing work. Referees accepted individual appointments rather than operating under continuous employment arrangements.

Professional standards and oversight existed, but the tribunal found them insufficient to create a traditional employment relationship.

That distinction matters because many businesses mistakenly assume that supervision or compliance requirements automatically point towards employment. In reality, self-employed contractors often operate within structured and regulated environments.

The courts continue to focus on practical working arrangements rather than labels alone.

A business may describe someone as self-employed in a contract. However, if they work fixed hours under close supervision with little independence, HMRC may still argue the relationship resembles employment.

Criticism of HMRC’s CEST employment status tool

The recent ruling has also reignited criticism of HMRC’s Check Employment Status for Tax (CEST) tool.

Critics argue the tool oversimplifies a highly complex area of law and struggles to reflect how tribunals assess real-world working arrangements. That criticism has existed since CEST was introduced in 2017.

The underlying issue is that employment status rarely depends on one single factor. Tribunals examine multiple aspects of the relationship together, often placing different weight on individual elements depending on the circumstances.

This creates obvious challenges for businesses seeking certainty.

A company may complete a CEST assessment in good faith and still face an HMRC challenge years later. Different advisers can also review the same arrangement and reach different conclusions.

The PGMOL case demonstrates just how subjective employment status disputes can become.

What businesses should learn about employment status

This case contains several important lessons for businesses using contractors and freelance workers.

First, contracts alone are not enough. If day-to-day working practices differ from the written agreement, tribunals will usually place greater weight on the practical reality of the relationship.

Second, employment status reviews should not be treated as one-off exercises. Contractor relationships often evolve over time, particularly where workers become integrated into the business.

Third, consistency matters. HMRC increasingly uses data analysis and cross-checking systems to identify discrepancies involving payroll, invoices and contractor payments.

Sectors heavily reliant on contractors remain particularly exposed, including:-

• construction
• consultancy
• IT services
• logistics
• healthcare
• property services

For many businesses, the uncomfortable reality is that employment status reviews are no longer something that can be postponed indefinitely.

Why employment status rules remain so difficult

The broader issue exposed by the PGMOL case is the continuing complexity of UK employment status law.

After years of litigation and multiple appeals, the courts still needed to reconsider the same arrangements under revised legal guidance. That alone demonstrates how difficult it is to apply these rules consistently.

Modern working patterns have only added to the uncertainty. Flexible contracting, consultancy arrangements and freelance work have blurred many of the traditional boundaries between employment and self-employment.

At the same time, HMRC continues to focus heavily on compliance in this area because of the tax revenues at stake. The result is a system where many businesses struggle to apply the rules confidently, even with professional advice.

Conclusion

HMRC’s latest defeat in the PGMOL case is another reminder that employment status remains one of the most difficult areas of UK tax law.

The ruling reinforces a point the courts have repeatedly made: employment status depends on the practical reality of the working relationship, not simply the wording of a contract or the result of an online assessment tool.

Businesses that use contractors, consultants and self-employed workers should review their arrangements regularly rather than wait for HMRC scrutiny.

At Wilkins Southworth, we advise businesses on employment status reviews, IR35 concerns and HMRC disputes. If you are unsure whether your current arrangements could attract HMRC attention, our team can help you assess the risks and strengthen your position.

Wilkins Southworth were pleased to act for a client in a successful defence of an HM Revenue & Customs (HMRC) enquiry.

Our client approached us after his accountant had filed his 2025 tax return.  The tax return was filed with HMRC incorrectly and our client notified his accountant of the errors.  His accountant then refiled the tax return, but again it was incorrect.

HMRC opened up an enquiry into our client’s tax affairs and he then approached Wilkins Southworth to act for him.

We resolved their questions quite quickly but HM Revenue & Customs then contended that despite our client having paid his full tax liability of £1.6 million in January 2025, his last accountant had incorrectly filed an amended 2024/25 tax return, which our client hadn’t signed, stating a tax liability of a little over £65,000.

The contention from HMRC was that if they had not opened up an enquiry they would have refunded our client around £1.55 million plus interest.  Therefore, they contended that our client was Careless.

HMRC are now being proactive in this area and the First Tier Tribunal case of Douglas Boulton and The Commissioners for His Majesty’s Revenue and Customs reflects this.

HMRC alleged that a penalty of up to 30% under Schedule 24 Finance Act 2007 could be levied, which would have given rise to a maximum liability of around £460,000, for our client.

Schedule 24 Finance Act 2007 states penalties may be chargeable if the errors are found to result from Careless or Deliberate behaviour.  It is the taxpayer’s obligation to ensure their tax return is complete and accurate and by signing the tax return they make a formal declaration to that effect.

HMRC guidance CH82160 explains.

HMRC factsheet CC/FS7a ‘Penalties for inaccuracies in returns and documents’ explains how penalties for inaccuracies in returns and documents are levied.   Penalties will be charged if the behaviour is Careless, Deliberate or Deliberate and Concealed.  HMRC will work out the potential lost revenue (PLR) and this arises as:

• A result of correcting an inaccuracy in a return or document.
• An incorrect repayment.
• An incorrect claim.

Careless prompted disclosures suffer penalties of between 15% to 30%.

Our defence highlighted that the standard of ‘Reasonable Care’ is the behaviour which a prudent and reasonable person in the position of the taxpayer would adopt.

When our client appointed a Chartered Accountant and provided that person with the complete facts, you are entitled to rely on their advice (assuming the advisor was sufficiently qualified in the area of tax that the advice was given on) even if it turns out that your advisor was careless.

Needless to say, Wilkins Southworth won the argument.

When HMRC first issued Spotlight 63 in 2023, it sent a clear warning to landlords using hybrid partnership structures. By the time we revisited the topic in 2025, many were already dealing with enquiries, uncertainty and, in some cases, significant tax exposure.

Fast forward to April 2026, and HMRC has gone further.

Spotlight 63A is not a new warning – it is a deliberate escalation. HMRC has now set out, in detail, exactly why these arrangements fail and made it clear that the issue has not gone away. If anything, the position has hardened.

For landlords who believed the risks had settled or were reassured that their structure was compliant, this latest update is a clear signal. HMRC is not revisiting this area; the aim is to significantly restrict its viability.

A quick recap: what Spotlight 63 was really about

At its core, Spotlight 63 targeted hybrid partnership arrangements used by landlords to reduce their tax liabilities.

Typically, these structures involved a Limited Liability Partnership (LLP) with a corporate member. Rental profits could then be allocated to the company, allowing landlords to benefit from lower corporation tax rates rather than higher or additional income tax rates.

The growth in these arrangements followed the restriction of mortgage interest relief. For many leveraged landlords, the increase in tax liabilities created a strong incentive to find alternative structures.

As we highlighted previously, the issue was never simply the use of an LLP or a company. It was the disconnect between the legal form and the economic reality. Where profits were redirected without any genuine shift in control or risk, HMRC made it clear it would look through the structure.

What’s changed with Spotlight 63A

The key difference with Spotlight 63A is precision.

HMRC is no longer describing a risk in general terms. It is setting out how these arrangements are being marketed today and why they fail under multiple, overlapping pieces of legislation.

A common variation now involves indemnities. This is where the corporate member is said to assume responsibility for mortgage liabilities, creating what is presented as a capital contribution to the LLP, then used to justify allocating profits to the company.

HMRC’s position is that this is not a genuine capital contribution. As a result, the foundation for allocating profits to the corporate member falls away.

More importantly, HMRC is not relying on a single argument. It has identified several independent routes to challenge these structures:

• The mixed-member partnership rules (ITA 2005, ss.850C–850D) can reallocate excess profits back to the individual landlord
• Transferred income rules (ITA 2007, s.809AAZA) can treat income as still belonging to the landlord, regardless of the structure
• CGT transparency rules (TCGA 1992, s.59A) mean there is no effective transfer of the underlying property
• SDLT provisions can trigger charges on transfers and changes in profit shares
• In some cases, ATED may apply to high-value residential property held through corporate structures

The practical implication is clear: even if one argument were challenged, others remain. This is no longer a single-point failure; it is a structure HMRC can attack from multiple directions.

Why has HMRC issued this update now?

Spotlight 63A tells us something simple yet important: these arrangements are still in use.

Despite the original warning, promoters have continued to adapt and market variations of hybrid structures, often adding layers of complexity to address earlier concerns. For landlords under ongoing tax pressure, these solutions can still appear credible.

HMRC’s response is to remove any remaining ambiguity. This isn’t about raising concerns anymore; it’s about dismantling the structure, point by point.

More broadly, this reflects a shift in HMRC’s approach in many areas of taxation and the use of reliefs. Rather than issuing high-level warnings, it is increasingly setting out detailed legislative reasoning. The message is not just that a scheme is risky – it is that HMRC already knows how it will defeat it.

What this means in practice for landlords

For landlords already using these structures, or contemplating a move, the risk profile has changed materially.

Spotlight 63A makes it clear that HMRC has multiple, well-defined routes to challenge the outcome. This increases the likelihood of enquiries and significantly reduces the scope for defending the position if challenged.

In practical terms, this may lead to:

• Reallocation of profits back to the individual landlord
• Additional income tax liabilities
• Interest and penalties
• Unexpected charges, including SDLT
• Potential ongoing liabilities, such as ATED for certain structures

Many landlords entered into these arrangements in good faith, often based on professional advice. However, HMRC’s focus is on the effect of the structure, not the intention behind it.

For those considering similar arrangements today, the position is now clear. This is not an emerging risk – it is an area where HMRC has already formed and published a detailed view.

A familiar pattern in the property sector

For landlords and property investors, there is a broader pattern here that is worth recognising.

Since the restriction of mortgage interest relief, landlords have been presented with a range of strategies designed to reduce their tax exposure. Some are entirely appropriate when aligned with a genuine commercial structure. Others rely on recharacterising income without any meaningful change in how the business operates.

HMRC’s response has been consistent. Where the structure does not reflect the underlying reality, it will be challenged.

The cycle is familiar: a solution is marketed, it gains traction, HMRC reviews it, and eventually publishes its position. By that point, many landlords are already committed.

The way forward: taking control early

If any of this feels familiar, the most important step is to review your position early and take the appropriate action.

Structures involving LLPs with corporate members, particularly those established in response to mortgage interest relief changes, remain a clear area of focus. The addition of indemnity-based arrangements only increases the need for a detailed review.

Acting early preserves options and, depending on the circumstances, this may involve restructuring, engaging with HMRC proactively, or planning an orderly exit from the arrangement.

Waiting reduces those options – often significantly – and can increase both the financial and administrative cost of resolving the position.

How can we help

At Wilkins Southworth, we have supported a growing number of landlords affected by Spotlight 63 and similar arrangements.

Our focus is on how the structure operates in practice, not just how it was intended to work. This allows us to assess the level of exposure and identify the most effective route forward.

Where HMRC engagement is required, we assist with managing enquiries, negotiating outcomes and, where possible, reducing penalties. In other cases, the priority is restructuring and ensuring future arrangements are aligned with both commercial objectives and current tax rules.

Each situation is different, but early engagement typically leads to more flexibility and better outcomes.

Final thoughts

Spotlight 63A is not a standalone update. It is the continuation of a process that has been developing over several years and is now becoming more definitive.

HMRC has moved beyond general warnings and is now setting out in detail why these arrangements fail and how they will be challenged.

For landlords, this is no longer a question of interpretation, but more one of understanding your position and deciding what to do next. If you are unsure about your current structure or concerned about potential exposure, now is the time to get in touch so we can assess your current situation.

For most people, a tax refund doesn’t attract much attention. It tends to be the result of something relatively minor: an adjustment through PAYE, an allowance that wasn’t claimed, or a timing difference that has now been corrected. 

The system reconciles, and the money comes back – and that is still the case, the vast majority of the time.

What has changed, however, is how some of these refunds are being generated.

Increasingly, they are not the result of a taxpayer identifying an issue or working through their position with an adviser, but of being approached by an unknown third-party, often online, with the suggestion that a repayment is waiting to be claimed.

The process is usually presented as quick and uncomplicated. Authority is granted, a claim is submitted, and a refund follows, but only later does the detail begin to matter.

A familiar service, approached differently

At one level, none of this is new; advisers have always helped clients recover overpaid tax, and there is nothing unusual about charging a fee based on the outcome.

Where the distinction begins to emerge is in how the claims themselves are prepared.

In a traditional setting, a refund would follow a review of records, a discussion of the individual’s circumstances, and a clear understanding of what is – and is not – allowable. That process takes time, and the outcome is usually grounded in evidence.

However, some of the newer business models take a different approach. 

Rather than working through the details, they rely more heavily on standard categories, assumptions, or broadly applied percentages. From the outside, the figures appear reasonable enough. For the taxpayer, the experience is often straightforward – little involvement, and a quick result.

The difficulty is that what appears reasonable at a glance does not always reflect the underlying position.

Not all advisers are subject to the same standards

It is also worth recognising that not everyone offering tax services operates under the same level of oversight.

In the UK, anyone can describe themselves as an “accountant”, regardless of qualifications or regulatory status. By contrast, “chartered accountant” is a protected term, reserved for members of recognised professional bodies.

That distinction is not always clear in practice.

You may find some firms present themselves in a way that suggests a level of expertise or oversight that may not exist, while others provide little transparency around who is preparing the work or what standards are being applied.

This does not necessarily mean the advice is incorrect, but it does affect the level of assurance behind it, particularly where claims are prepared quickly and with limited explanation.

In some cases, potential issues only come to light once HMRC opens an enquiry, or, more rarely, when matters reach a Tribunal. A recent Tribunal case involving Welcome Accountancy Services highlighted how tax refund claims had been submitted on a basis that could not be supported when examined in detail, raising wider questions around oversight and the standards being applied.

Where claims start to come under pressure

Employment expenses are often where this approach becomes most visible.

The rules themselves are well established, but they leave less room for interpretation than many expect. For an expense to be deductible, it must be incurred wholly, exclusively and necessarily in the performance of employment duties. That wording is deliberate, and it sets a high threshold.

In practice, many everyday costs fall outside it.

Travel provides the clearest example: the journey between home and a permanent workplace, regardless of distance, is generally not allowable. Nor are the broader costs of maintaining employment, even where they feel closely connected to the role.

Despite this, some claims include substantial deductions for travel, professional fees, or other general categories of expense. When viewed in isolation, the numbers may not immediately appear unusual, but when considered in the context of the rules, they can be difficult to support.

One problem is that this distinction is not always obvious at the time the claim is made.

Why the issue doesn’t always surface immediately

The way HMRC processes returns plays a part in how these situations develop.

Given the volume of submissions received each year, there is a practical need to issue repayments efficiently. In many cases, refunds are processed before a detailed review takes place. For genuine claims, this is clearly beneficial as delays would serve little purpose.

However, it also means that not every claim is tested at the outset.

Where figures appear broadly credible, they may pass through the system without challenge. More detailed scrutiny often occurs later, when information is reviewed alongside other data or inconsistencies start to emerge over time.

By that stage, the repayment has already been received, and the question is no longer whether the claim should be made, but whether it can be justified.

Responsibility does not transfer with the work

One of the more uncomfortable aspects of these situations is where responsibility ultimately sits.

Even where a third party prepares and submits a return, the legal responsibility for its accuracy remains with the taxpayer. That position does not change based on who calculated the figures, their qualifications or how the claim was presented.

For many, this runs counter to expectation. If an adviser has been engaged, particularly one who presents themselves as experienced or qualified, it is natural to assume that accountability lies with them. In practice, HMRC will usually look to the individual first.

If questions are raised, it is the taxpayer who is expected to explain the position, provide evidence, and support the figures submitted on their behalf. Many of you will know that an HMRC investigation can prove costly, even if ultimately your figures are found to be in order.

When enquiries begin, the detail matters

An enquiry may start as a routine request for clarification, but it quickly becomes a question of evidence:

• How were the figures calculated?
• What do they relate to?
• What records support them?

These are not unreasonable questions, but they can be difficult to answer when the original claim was not supported by detailed documentation.

In some cases, records are incomplete; in others, they may not exist at all. There are also situations where the figures cannot realistically be reconciled with the taxpayer’s actual circumstances.

At that point, the position becomes more complex and can raise red flags with HMRC, potentially leading to:

• Return of refunds
• Interest charges 
• Additional penalties

Depending on how HMRC views the behaviour behind the claim, what may have started as a relatively straightforward refund can evolve into a much more involved process.

Why this is becoming more visible

This is happening against the backdrop of a broader shift within the tax system, resulting in more complexity and a record tax take.

HMRC now has access to increasing amounts of data from third parties, including employers, financial institutions and digital platforms. At the same time, initiatives such as Making Tax Digital are moving reporting toward more frequent and structured submissions.

Taken together, these changes make inconsistencies easier to identify.

Claims that might previously have gone unnoticed are more likely to be picked up, particularly where patterns emerge across multiple returns or over several years. The direction of travel is clear: greater visibility, more data, and closer alignment between reported figures and underlying activity.

Recognising the warning signs

It is important to recognise that not all refund services present a risk. Many legitimate advisers provide valuable assistance in recovering overpaid tax.

However, certain features tend to appear more frequently in problematic cases:

1. Promises of guaranteed or unusually large refunds are one example
2. Claims based on fixed percentages, rather than individual circumstances, are another
3. Limited discussion of the underlying position or a lack of clarity about how figures have been calculated
4. Requests to use personal HMRC login details should be approached with particular caution

Individually, none of these points are conclusive. However, taken together, they usually indicate the claim hasn’t been prepared with the level of care required.

Taking a more considered approach

Where a refund is genuinely due, the process should be able to withstand scrutiny.

That typically involves understanding the taxpayer’s circumstances, reviewing supporting records, and applying the rules to the facts as they actually are. It is not always the quickest route, but it is the one that provides certainty.

In some cases, the outcome will be a repayment; in others, it may simply confirm that the original position was already correct. Both outcomes are valid.

The key point is that the position can be supported if it is ever questioned.

Conclusion

Tax refunds are a normal and necessary part of the system. They ensure that taxpayers do not pay more than they owe, and in most cases, they arise without issue.

The risk lies not in the refund itself, but in how it has been calculated.

A claim that appears straightforward at the outset may look very different when examined in detail. Where the underlying figures cannot be supported, the consequences tend to fall back on the taxpayer, regardless of who submitted the return.

If you have submitted a claim recently, or are unsure whether a refund you have received would stand up to scrutiny, it is worth reviewing the position now rather than waiting for HMRC to ask questions.

At Wilkins Southworth, we regularly help clients assess claims, correct positions where needed, and manage HMRC enquiries when they arise. Addressing these points early is almost always more straightforward than revisiting them later. In tax, as in most areas of life and business, certainty is rarely found in shortcuts.

For many small business owners, moving money between themselves and their company is simply part of day-to-day financial management.

A dividend declared at year-end, a director’s loan to smooth cash flow, reimbursed expenses or the occasional transfer of assets. These are not unusual transactions – they are often essential to how owner-managed businesses operate.

But under new proposals from HMRC, these routine movements could soon face far greater scrutiny.

A recent consultation suggests that “close companies” – broadly defined as businesses controlled by five or fewer individuals – may be required to report detailed information on all transactions between the company and its participators. This includes cash withdrawals, loans, debts, dividends, distributions and asset transfers.

On the surface, this may seem like a logical step toward greater transparency. In practice, however, it raises a more complex question: is this a proportionate response to tax risk, or an additional layer of compliance for already stretched business owners?

What are the changes in HMRC April 2026?

The core of the proposal is relatively straightforward.

HMRC is seeking greater granularity into how money flows between small companies and their owners. Under the new rules, close companies could be required to disclose a wide range of financial interactions, including:

• Cash withdrawals by directors or shareholders
• Loans to and from participators
• Outstanding debts
• Dividend payments and other distributions
• Transfers of assets between the company and individuals

In effect, HMRC would move closer to a position where most, if not all, financial relationships between a company and its owners are routinely reported.

For businesses already maintaining detailed records, this may seem like an extension of existing obligations. For many others, it represents a shift toward far more structured and formalised reporting.

HMRC’s rationale: Tackling the tax gap

HMRC’s justification for these proposals is clear: reducing tax avoidance (or the “tax gap” as it is commonly referred to).

According to its estimates, up to 60% of the UK’s tax gap – the difference between expected and actual tax receipts – is attributed to small businesses. Close companies, in particular, are seen as having the flexibility to structure financial arrangements in ways that reduce tax liabilities, ranging from entirely legitimate planning to more aggressive avoidance.

From a policy perspective, the argument is simple. If the perceived risk sits within smaller, owner-managed businesses, then increasing transparency in that area should, in theory, improve compliance and reduce lost revenue.

However, the headline figure – that small businesses account for the majority of the tax gap – warrants closer examination.

Where does the tax gap really arise?

The concept of the tax gap is often presented as a single figure, but in reality, it comprises several distinct components.

These include:

• Income that is never declared (the so-called “hidden economy”)
• Errors in tax returns (often unintentional)
• Deliberate evasion
• Legal but complex tax structuring

While small businesses undoubtedly feature within this mix, many would question whether compliant, owner-managed companies – those already engaging with accountants and submitting returns – represent the core of the issue.

A significant proportion of the gap is widely understood to arise from income that is never reported, rather than from businesses operating within the system. At the other end of the spectrum, large multinational structures, including transfer pricing arrangements, have historically attracted scrutiny due to their ability to shift profits across jurisdictions.

This raises a broader question of focus. If the objective is to reduce the tax gap, is increasing reporting requirements for compliant small businesses the most effective route, or simply the most administratively accessible one?

Strip away the headline figures, and there is a legitimate question as to whether small businesses are simply an easy target.

A growing concern among small businesses

Unsurprisingly, the reaction from the small business community has been cautious.

The Federation of Small Businesses (FSB) has already warned that the proposals risk increasing compliance costs and further complicating an already challenging system. For many business owners, the concern is not about paying the correct amount of tax; it is about the cumulative burden of navigating the rules.

Unlike larger organisations, small companies do not have internal tax departments or dedicated compliance teams. The owner often handles financial management alongside running the business, with periodic support from external advisers.

In this context, even relatively modest increases in reporting requirements can have a disproportionate impact.

There is also a wider frustration that will be familiar to many: dealing with HMRC is rarely straightforward.

Queries can take months, sometimes years, to resolve, and guidance is not always clear or accessible to those without specialist knowledge.

Adding further layers of reporting, without addressing these underlying issues, risks compounding the problem rather than solving it.

The practical impact: What this could mean in reality

While the proposals are still at the consultation stage (closing on the 10th June), the potential implications for small businesses are significant.

Increased administrative burden

At a basic level, more reporting means more work and ultimately, higher cost.

Transactions that may previously have been recorded informally, or simply understood between the business and its adviser, could now require detailed documentation and categorisation. This includes ensuring that all movements between the company and its participators are clearly tracked and justified.

For some businesses, this will require changes to internal processes. For others, it may mean introducing entirely new systems.

Higher professional costs

Greater complexity inevitably leads to greater reliance on professional advice. Accountants will need to review additional data, ensure compliance with evolving rules, and potentially spend more time resolving discrepancies. 

For business owners, this translates into higher fees and more frequent engagement with advisers. While this may be manageable for established companies, it is a different proposition for smaller or early-stage businesses operating with tighter margins.

Increased risk of enquiries and disputes

More data does not necessarily mean more clarity. In fact, increased reporting can create more opportunities for inconsistencies, particularly where transactions are complex or span multiple tax periods. Even minor discrepancies between reported figures and HMRC’s interpretation could trigger enquiries.

Given existing delays within HMRC systems, these enquiries can be lengthy and resource-intensive. What might begin as a routine query can quickly turn into a prolonged process, creating uncertainty and additional costs.

A shift in behaviour

Perhaps the most subtle impact is behavioural.

Faced with increased scrutiny, some business owners may choose to simplify their financial interactions with their company. This could mean avoiding director’s loans, altering dividend strategies, or reducing flexibility in managing cash flow.

While this may reduce perceived risk, it can also lead to less efficient financial decision-making – particularly where existing structures are entirely legitimate and appropriate.

Striking the right balance

There is a reasonable argument for improving transparency – there is little disagreement on the principle – but is this the right way, the best way?

Requiring businesses to report certain transactions – predominantly those involving loans or significant cash movements – could help HMRC identify areas of genuine concern. In isolation, this is unlikely to be controversial. The challenge lies in how far the rules extend.

There is a clear distinction between targeted reporting designed to highlight risk and a broad requirement to capture all interactions between a company and its owners. The former may be proportionate. The latter risks becoming overly burdensome, particularly when layered onto an already complex system.

As one tax expert noted in response to the proposals, reporting certain transactions may have minimal impact. Requiring businesses to fully engage with the technical rules governing close companies, however, could be far more demanding.

Part of a wider trend

Those in business today will be well aware that these proposals do not exist in isolation.

Over recent years, HMRC has been steadily moving toward greater data collection and digital reporting. Initiatives such as Making Tax Digital reflect a broader shift toward real-time visibility of taxpayer activity, supported by software and automated systems.

From this perspective, the proposed changes are consistent with a longer-term direction of travel. The expectation is clear: more frequent reporting, greater transparency, and fewer gaps between economic activity and tax reporting.

For business owners, this reinforces the need to adapt systems, processes and habits. All of which may have been sufficient in the past, but are unlikely to remain so in the future.

What should business owners be doing now?

While the rules are not yet finalised and the proposals may be watered down, there are practical steps worth considering:

• Review how funds move between you and your company
• Ensure transactions are clearly documented and supported
• Consider whether existing processes would stand up to increased scrutiny
• Speak with your accountant about potential changes

Preparing early is likely to be far less disruptive than reacting once new requirements are introduced.

Conclusion

HMRC’s objective of reducing tax avoidance and improving transparency is understandable. However, the route to achieving it matters.

For many small businesses, the concern is not the principle of compliance, but the cumulative weight of additional reporting, rising costs and ongoing uncertainty. There is a risk that measures designed to target a minority could impose a broader burden on those already operating within the rules.

The real test will be whether these proposals strike the right balance: addressing genuine areas of risk without turning routine business activity into a disproportionate compliance exercise.

If you are unsure how these potential changes could affect your business, or whether your current structure would withstand increased scrutiny, it may be worth reviewing your position now rather than waiting for the rules to take effect.