For many years it has been every Chancellor of the Exchequer’s aim to reduce the tax gap to provide greater funds for carrying out their political, social and economic objectives.
The tax gap, simply put, is the difference between the tax due and payable by the nation’s taxpayers and the amount collected by HMRC on behalf of the Exchequer each year. For the 2024/5 tax year this was reported as more than £59 billion or 6.4% of the total tax due.
The then and now
Former Tax Inspectors can recount the efforts made to identify, calculate and recover outstanding tax liabilities from individuals and businesses large and small. The building of a case and the prolonged investigation needed to quantify the lost tax involved drawing together many pieces of evidence and often a detailed trawl through the physical business and financial records of the taxpayer.
As computerisation began in HMRC, a slow but inexorable change took place in the approach to compliance. With the world moving into the digital age, more information became available to HMRC. Details of interest paid by banks on customer accounts, previously supplied in paper form was suddenly available in an electronic format.
Payroll systems were visible following the introduction of RTI and third- party data sources available to HMRC began to multiply as more statutory reporting requirements were introduced by successive Chancellors.
Data is only useful when it can be properly interpreted
Having such a large amount of data available was only of use to HMRC in its quest to improve tax compliance if it could be properly manipulated and interpreted. In 2010 the Revenue’s ‘Connect’ system was introduced – its first foray into data analytics.
Additional staff were recruited year on year to manage the output of the Connect system and produce ‘cases’ for use in the field for HMRC’s compliance officers to target potential high- risk individuals and businesses suspected of underpaying their taxes.
With the introduction of Making Tax Digital (MTD) first for VAT in 2019 and then later for landlords and sole traders, HMRC has gained immediate access to business records in digital format and the ability to look for trends and exceptions – all the indicators needed to evaluate the economics of a business and identify potential outliers for enquiry.
The results speak for themselves
The growing sense that HMRC’s compliance activity is becoming more visible and data-led is supported by their own figures. The reported yield of £50 billion in 2025/6 compares with £48 billion in the previous year and £41 billion in 2023/4.
Furthermore, they also report that £10 billion of tax was protected or recovered through the use of artificial intelligence and advanced analytics during 2025/6. This is not simply an increase in traditional tax enquiries. It represents a shift in the way in which HMRC identifies risk and decides when to intervene.
What does the future look like for HMRC?
Successive Budgets in recent years have announced the recruitment of additional staff to work on tax compliance and HMRC’s Transformation Roadmap explains how it is planning to invest heavily in AI, advanced analytics, third-party information and improved case management systems.
The objective for HMRC is clearly to improve the selection of cases for investigation concentrating on the high risk – high yield instead of wasting time and resources reviewing low risk – low yield cases.
As well as harnessing technology in its compliance strategy, HMRC also continues to use tried and proven approaches based on industry sectors. There has long been a cycle of targeting what HMRC consider ‘risk’ industries or business sectors and it continues to focus on wealthy individuals and offshore matters, small businesses and the self- employed, players in the labour market and the construction industry.
What is known as ‘upstream compliance’ where HMRC want to prevent an incorrect return being filed in the first place is becoming an important approach in the strategy.
The use of ‘nudge letters’ has become a common outcome of the use of AI. It’s based on HMRC’s systems identifying something unusual amongst a body of taxpayers or within an industry sector and prompting the taxpayer to consider or reconsider their tax return.
Such strategies are made possible by the manipulation of masses of data and the subsequent analyses. HMRC openly report that it maintains a cloud database containing 97 million unique records in its Central Customer Registry providing it with a ‘rounded’ view of its customers!
If you’re unsure, our advice is to speak to your accountant
It is more important than ever to have a professional accountant working with you and your business to support you through the day-to-day accounting and tax, as well as to offer support and assist with any HMRC queries. For any advice or guidance get in touch with a member of our team.
