Mind the gap – HMRC’s £1.4bn mission to close the tax compliance gap

Subscribe

The Government has made it clear that it will be looking to increase tax revenues, with a distinct focus on tax compliance.

In the Autumn Budget, the Chancellor announced “the most ambitious ever package to close the tax gap”. This includes a £1.4bn investment to recruit and train 5,000 compliance staff and the appointment of a Covid Corruption Commissioner to recover funds from those who wrongly claimed government support during the Covid 19 pandemic.

The Treasury says this will raise £6.5bn a year in additional tax revenue per year by 2029/2030 and will therefore result in increased tax investigation activity.

The latest figures, published in June 2024, show that the tax gap - the difference between the amount of tax HMRC believes is owed and the amount that was paid – for 2022/2023 stands at a record high of an estimated £39.8bn (4.8 per cent of tax liabilities). With such a deficit, it comes as no surprise that in the last quarter, HMRC has opened 93,000 tax investigations, well above the average for previous periods of 78,000.

What will this mean for businesses and individuals?

With greater resources, we would anticipate that a key focus area for HMRC activity will be on employer compliance - particularly given that PAYE and National Insurance Contributions account for the largest proportion of tax revenues for the Government - and with the appointment of a new Covid Corruption Commissioner, payments for furloughed staff under the Coronavirus Job Retention Scheme are very likely to see at the top of the investigation list.

HMRC already conducts regular National Minimum Wage compliance campaigns, and while the revenue isn't necessarily targeting employers it believes are deliberately paying below NMW rates, these audits can often find technical breaches in areas such as working time, pay deductions and age-related rates. Certain ‘non-employees’, such as contractors and consultants, can also be subject to NMW rules and this is an area of particular interest for HMRC when reviewing a business’ records.

What can make you a target for an HMRC investigation?

There are several reasons why you may be more likely to trigger attention from HMRC.

• Changes in your financial reporting
• R&D tax relief claims
• High-net worth
• Capital Gains Tax enquiries
• Sale of a business
• Incorrect information held by HMRC
• Malicious tip-offs

The important thing to remember is no one is immune to a tax investigation – even companies and individuals confident of their compliance – and it is a process that can be intrusive, obstructive and very costly.

What can businesses do to prepare in the increasing likelihood of tax investigation?

First and foremost, you need to ensure you identify any compliance gaps in your business or personal tax affairs before HMRC opens an enquiry. With National Minimum Wage and employer National Insurance Contributions set to increase in April 2025, employers will need to be extra vigilant of their compliance in these areas.

If HMRC launches an investigation into you or your business, the range of records and documents the inspector might check is vast. They’ll contact you or your accountant in advance to set out the evidence they want to see or information they are wanting to collect. This will likely include your annual HMRC tax returns, any PAYE records, tax you have paid, self-assessment returns, full company records or tax calculation evidence.

If you have any concerns regarding the compliance of your business it is best to seek guidance and advice before HMRC gets in touch. At Armstrong Watson our team of tax experts are here to support you with a review to ensure you meet the regulatory requirements.  For those who have already been contacted by HMRC regarding an investigation, our tax compliance team are here to support you throughout the process and hopefully help you achieve a better outcome for you and your business.