HMRC Compliance Crackdown

HMRC is intensifying its compliance and enforcement efforts as we approach the end of the 2024/25 tax year. Every week, there seems to be a new headline involving prosecutions and appeals as the authorities look to close the tax gap. While we await more up-to-date information, we know there was a gap of £39.8 billion in the 2022/23 tax year, the difference between tax due and tax collected. A significant amount of money!

This article will examine the primary focus areas for tax compliance and investigations in 2025, analysing the implications for businesses and individual taxpayers. On closer inspection, HMRC appears to have switched to a prosecute first and ask questions later policy, although some would argue this has always been the case.

We know the focus is tax avoidance, enforcing accurate reporting and improving digital tax collection mechanisms, but what does this mean in practice?

Understanding HMRC’s strategic objectives

Many areas of HMRC are a mystery to businesses and individuals, even accountants, but, to be fair, HMRC’s strategic objectives have remained relatively constant.

Reducing the tax gap

Many will be stunned to learn that the difference between tax due and tax collected in the 2022/23 tax year was a staggering £39.8 billion. A significant element of this difference relates to business errors, tax evasion and underreporting. As we move towards a more digitised era, with “Making Tax Digital” central to HMRC plans in the future, this gap is expected to fall significantly.

Strengthening tax compliance and enforcement

The government has announced plans to invest £1.4 billion in tax compliance over the next five years. While a significant amount of money is needed, many would argue that this is too little, too late, for a system that is creaking and in danger of collapse. While introducing 5,000 new compliance officers will help with these broader objectives, the proof is always in the pudding.

Technological advancements

From a technological standpoint, AI, big data and machine learning are expected to make a huge difference. Integrating AI-powered systems to detect discrepancies in tax returns and financial filings is priceless. However, a partially automated recruitment system already uses cutting-edge AI but has attracted some criticism from observers. Is HMRC going a step too far?

More focused investigations are likely to identify significant revenue sources, which, together with debt recovery services, are forecast to bring in an extra £6.2 billion per annum by the 2029/30 tax year.

Key areas of HMRC focus in 2025

A quick review of the financial headlines will show you where HMRC is focusing resources in 2025.

Research and development tax relief

The significant growth in the number of technology, software, and engineering companies in recent years has seen claims for research and development tax relief rise significantly. Some reports suggest that R&D tax relief fraud/errors cost the UK more than £4 billion annually.

Historically, investigation rates in this area covered one in 100 claims, but this has increased to one in five to identify fraudulent activity. If you claim R&D tax relief, your project records must be up-to-date, including a breakdown of qualifying expenditures. It might be useful to obtain expert guidance before submitting any claims.

Code of Practice 9 (COP 9) tax fraud investigations

The number of COP 9 tax fraud investigations will increase dramatically in the future. These enquiries allow individuals immunity from criminal prosecution for tax offences in return for full disclosure of tax fraud. Often referred to as the Contractual Disclosure Facility (CDF), this is part of HMRC’s fraud investigation service.

As the main focus is on retrieving as much missing tax income as possible, it is much quicker and less expensive to consider these arbitrary arrangements. While the admission of illegal activity will not result in criminal prosecution, it will allow HMRC to identify and monitor the perpetrators in the future.

If you receive a COP 9 notice, seeking professional guidance before submitting self-audit tax filings would be sensible to ensure accuracy and compliance. Failure to correct previous “misreportings” will likely lead to criminal prosecution, fines and potential restrictions on future activities.

National minimum wage compliance

Another key focus area going forward will be compliance with the national minimum wage regulations. We know that many businesses are being pushed to the financial edge by an increase in the national minimum wage and employer’s national insurance. HMRC will be interested in any misclassification of employees and/or failure to pay the correct wages.

To confirm full compliance, company owners would be advised to review their payment systems and conduct an internal audit to ensure compliance with evolving wage regulations. Failure to do so could lead to significant fines and potentially greater brand and reputational damage.

VAT on private school fees

One headline-grabbing change was the introduction of VAT on private school fees, which has prompted several “ambitious” ways to circumnavigate increased tax obligations. This change occurred in January 2025, and HMRC will take a proactive approach to tax oversight, ensuring that schools adjust their pricing structures and billing systems accordingly.

Digital platform income reporting

From 1 January 2024, digital platforms such as eBay, Uber and Etsy (to name but three) are obliged to declare the details of users earning more than £1700 per year or carrying out more than 30 sales in a calendar year to HMRC,  

This is slightly at odds with individual limits, whereby those with additional regular trading income exceeding £1,000 must declare this to HMRC. However, changes to the reporting threshold have been announced for April 2025.

Where income doesn’t exceed £3000, it can be declared and tax paid online without a self-assessment tax return. Where income exceeds £3000, it must be declared and tax paid via a full self-assessment return. If HMRC decides to review activity in previous years, detailed earnings records going as far back as possible would be helpful.

Undeclared cash businesses

While the tax authorities have tried numerous times to control cash-heavy industries, this has always proved challenging. We have seen the emergence of cash-in-hand car washing services, pet sales, waste management and hospitality services, to name a few, where HMRC suspects returns have not been as complete as they should be.

Some of these business sectors will be licensed going forward to reduce tax avoidance and errors. Operators must also register for self-assessment and potentially VAT while maintaining accurate financial records and declaring total income.

Self-employment and IR35 tax investigations

This is part of an ongoing crackdown by HMRC, which is reviewing and investigating self-employment status claims for contractors and freelancers. We have seen high-profile court cases involving sports stars, Premier League referees, and TV presenters. The issue revolves around self-employment status when, in reality, their employment conditions may be similar to those of a full-time employee.

HMRC is using the legal route to test the water and use successful prosecutions to pursue others in a similar situation. The high-profile nature of many of these court cases should not be underestimated. They are a valuable means for HMRC to convey the message, “We are coming for you”. Those in this situation should review their IR35 status and ensure their contracts align with self-employment laws. Where there is any ambiguity, you should seek professional advice as soon as possible.

Implications for taxpayers and businesses

While forecasts vary widely, the illegal economy in the UK is helping individuals and companies avoid billions of pounds a year in taxes. The introduction of AI and machine learning, as well as big data analysis, has already significantly improved the collection of overdue/undeclared taxes.

As the UK workforce expands, more businesses and individuals face increased scrutiny. Digital tracking and tech-powered audits mean even minor discrepancies can be identified, potentially triggering broader investigations which may uncover additional anomalies.

Record-keeping is critical for business owners, including up-to-date income logs, expenses, and tax calculations. Double-checking tax payables, VAT filings, and self-employment classifications can save thousands of pounds in fines and additional taxes. Correcting historical “oversights” with minimal financial and reputational damage, after a prompt from HMRC, could be a thing of the past.

There is also greater emphasis on individuals with so-called “side hustles”, which may have been considered irrelevant and not reported in years past. Enhanced data sharing between digital platforms and HMRC will allow the authorities to identify those failing to fulfil their income reporting obligations.

How to prepare for HMRC’s 2025 compliance drive

Ignorance is no longer an excuse when it comes to the underreporting of income and tax liabilities. As a business or individual, there are some simple ways in which you can prepare for enhanced scrutiny:-

• Conduct internal tax audits by reviewing previous tax filings and seeking applicable tax guidance.
• Ensure you maintain detailed financial records highlighting income, expenses, self-employment status and tax liabilities.
• Individuals and companies must track their earnings more carefully and report all taxable income.

Several attempts to avoid additional taxation and scrutiny have emerged in just a few months since the changes were announced. HMRC is well aware of these strategies and, using the latest AI, machine learning, and big data analysis, is pursuing a growing number of companies and individuals.

HMRC Compliance Crackdown – Conclusion

It is common knowledge that HMRC will intensify tax investigations in 2025. The primary focus will be R&D tax relief fraud, wage underpayments, VAT compliance, gig economy earnings, and illegal activities surrounding undeclared cash-in-hand transactions. Consequently, many individuals and businesses must strengthen their compliance procedures to avoid financial penalties.

There is no doubt that more enquiries are coming, and it’s important to proactively address any compliance issues before an HMRC investigation. Where applicable, seek professional tax advice as soon as possible to ensure you abide by current regulations. Your accountant and professional adviser will also be able to assist you with keeping tabs on future tax law updates to avoid unnecessary penalties and legal risks.

Our experience with HMRC and tax regulations is proving valuable for a growing number of individuals and business owners. We can discuss your concerns, look at your existing systems and clarify your status regarding full compliance. It’s crucial that you take a proactive approach before HMRC becomes involved.

Feel free to contact us, and together we can review your situation in more detail.