HMRC in the spotlight: tackling tax fraud

28 January 2025

In October 2024, HMRC published statistics relating to offshore non-compliance. These statistics estimated that the tax gap relating to offshore non-compliance in 2018/19 was £0.3bn, admitting that this was not a complete measure. The Committee of Public Accounts (PAC) has outlined concerns that this estimate looked implausibly low whilst also noting that there is no way of making an accurate estimate.

HMRC continues to receive information on taxpayers annually through the Common Reporting Standard, with financial institutions from over one hundred tax jurisdictions automatically exchanging information on financial accounts. HMRC’s data analysis tool, Connect, compares the information received with taxpayer records to identify potential non-compliance, and when it is believed that tax has not been paid on overseas income and/or gains, an enquiry into the taxpayer is opened. This approach is a resource efficient, tried, and tested means for HMRC to use this data but with the perceived shortfall HMRC needs more resource or focus in this area to help close the tax gap.

HMRC had estimated the tax gap for 2022/23 to be £39.8bn, with small businesses estimated to make up 60% of that shortfall. The 2024 Autumn Budget announced 5,000 additional compliance officers for HMRC and it was outlined that these additional compliance officers would focus on tackling non-compliance among small businesses. However, as part of the PAC report, HMRC stated tackling non-compliance among small businesses is challenging given the large number of cases.

The PAC report also highlights 2023/24 criminal prosecutions were down by around 50% compared to pre-Covid levels. Criminal prosecutions are considered to have significant deterrent effect and the report highlights PAC’s concern at the falling number of HMRC prosecutions. HMRC’s published criminal investigation policy outlines that it should “deal with fraud by the use of the cost-effective civil fraud investigations under Code of Practice 9 where appropriate” and that “criminal investigation will be reserved for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate”. The PAC report recommends that research is undertaken to explicitly consider whether there are trade-offs between civil and criminal investigation routes.

HMRC outlined that there was currently limited evidence about the deterrent effect of criminal investigation and prosecution, but that it could still impose significant sanctions using civil processes. These comments indicate that HMRC will continue to use its civil investigative powers to investigate tax fraud.

The significant sanctions HMRC refer to are not only the financial penalties that HMRC is able to charge on underdeclared taxes which can be up to 200% of the tax itself, but also the naming and shaming of defaulters on HMRC’s website. Taxpayer details are published online for those who have deliberately misrepresented their tax position and not fully co-operated with HMRC’s enquiries.

The concern expressed by the PAC that HMRC is not using the criminal enforcement tools at its disposal, the lack of a prosecution under the criminal facilitation of tax evasion (CCO) offence, and a falling number of investigations into serious tax fraud and avoidance, highlights the direction that ministers believe HMRC should be heading.

The PAC report re-emphasises the pressure and scrutiny that is currently on HMRC, not only to vastly improve the customer service taxpayers receive and to collect outstanding tax debts but also increase compliance activity, not just to maintain the tax gap but to reduce it. The PAC’s parting comment is that HMRC “must be bolder in identifying and tackling abuse”.