In its most recent calculation, the UK government measured the latest tax gap – the difference between the annual amount of tax HMRC collects and the amount it believes is payable – at a total of £46.8bn.

With unpaid tax depriving UK public services of vital funding and putting businesses that pay the correct tax at a competitive disadvantage, it is in the wider public interest for HMRC to take action.

We believe there are four areas where HMRC may focus its efforts to reduce the tax gap.

Stronger corporation tax compliance and collection powers

Around £37.9bn, or 81%, of the tax gap is estimated to be the result of non-compliance associated with business activity, making it almost inevitable that HMRC will focus significant resources in this area. This is made all the more likely by the fact that this figure has been growing steadily in recent years.

In the tax year to 5 April 2014, it was estimated that corporation tax made up 10% of the tax gap. A decade later that figure has risen to 40%, with global economic pressures and external factors impacting businesses’ cash flow likely driving this trend.

Separately released figures show that in the 2023–2024 tax year, compliance checks were opened into nearly 16% of research and development (R&D) tax relief claims. This statistic comes as no surprise to those advising corporate taxpayers within this regime, and highlights the fact that HMRC considers this to be a high compliance risk. We expect HMRC to continue to allocate resource to policing these claims.

As part of any potential measures, HMRC may step up enforcement against those that choose not to disclose their exposure to tax, and pressure those that fail to pay their tax liabilities. The government’s recent spending review announced funding for the recruitment of 2,400 debt management staff over the next four years, suggesting HMRC will be particularly focused on collecting revenue from businesses that are not paying the right amount of tax, at the right time.

Corporate tax debt and phoenixism

The Committee of Public Accounts (PAC) issued a report earlier this year that stated the tax debt at 31 March 2024 was £43bn, approximately £20bn of which may be irrecoverable. It’s likely that a portion of this irrecoverable debt is due to company insolvencies. While many are genuine, some may be deliberately structured to evade tax or write off debts. In these cases, directors can dissolve a company only to establish a new one – a practice known as ‘phoenixism’.

With 60% of the overall tax gap attributable to small businesses, tackling phoenixism will be a pressing challenge for HMRC.

In the government’s spending review, a joint plan between HMRC, Companies House and the Insolvency Service was announced. This plan will better co-ordinate compliance activity targeting company directors who seek to liquidate companies to avoid paying tax.

Continued use of ‘one to many’ campaigns

The tax gap attributable to income tax, capital gains tax and National Insurance was £14bn, with over half of that related to self-assessment. Due to the high number of individual taxpayers in self-assessment, HMRC doesn’t usually open compliance checks into the tax returns of each individual taxpayer. Instead, it uses one to many (OTM) campaigns.

OTM campaigns are not formal compliance checks. Instead, they are designed to either educate taxpayers on common pitfalls or to prompt them to review their tax affairs for potential inaccuracies. With the onus on taxpayers to review their own position and disclose underdeclared tax liabilities to HMRC, this is a cost-efficient and proven method for HMRC to raise revenue.

Given the sizeable financial exposure associated with personal tax matters, HMRC’s resource constraints and the efficiency with which additional revenue can be realised, HMRC is likely to continue using these campaigns going forward.

Tax fraud and cracking down on criminals

In the tax year ending 2024, HMRC opened 430 new criminal investigations into suspected tax fraud. However, civil investigations totalled more than 10,200, reflecting HMRC’s strong preference for using its civil powers of enforcement for all but the most serious criminal offences.

At an estimated £4.4bn, criminal activity makes up 9% of the tax gap. To counter this, the government committed to expanding HMRC’s counter-fraud capability and to increasing the number of annual charging decisions for the most harmful fraud by 20% by the year 2029 to 2030. As part of this, additional criminal investigations will be used to tackle tax fraud.

It’s possible we may see a shift in HMRC’s approach to tackling tax fraud away from civil investigations to criminal investigations. But with criminal investigations expensive to carry out, and beneficial outcomes for all parties still available through Code of Practice 9, we may see an increase in those that access the Contractual Disclosure Facility.

While these are only predictions, HMRC will no doubt continue to come under increasing pressure to close the tax gap. With this pressure, and the additional investment and third-party information made available to HMRC, it is highly likely that the extent of HMRC’s compliance activity shows no sign of declining any time soon.

For more information, please get in touch with Olivia Wiggett, Paul Marcroft, or your usual RSM contact.