If you've spent the last week attempting to complete a tax return while simultaneously melting into your office chair, you've probably noticed two things. Firstly, Britain is experiencing a heatwave. Secondly, HMRC appears to be experiencing one of its own.
Recent headlines have pointed in a remarkably consistent direction. HMRC has published a larger-than-expected UK tax gap, expanded its use of nudge letters and launched a consultation on tougher sanctions for inaccurate tax declarations. Taken together, the message is fairly clear: tax compliance is moving higher up the government's agenda.
The Tax Gap Gets Bigger
HMRC's latest figures put the UK's tax gap at £59.2 billion. That's the difference between the amount of tax that should theoretically be collected and the amount that actually reaches the Treasury.
For any government facing difficult spending decisions, closing that gap has an obvious attraction. Recovering unpaid tax tends to be a much easier sell than increasing tax rates.
Whether HMRC can reduce the gap by the amounts it hopes to is open to debate, but one thing seems certain: compliance activity is unlikely to decrease any time soon.
The Rise of the Nudge Letter
For many taxpayers, HMRC's preferred tool isn't a tax investigation. At least not at first.
Instead, it's the increasingly common nudge letter.
These letters are typically issued where HMRC's data suggests something may not add up, whether that's overseas income, rental profits, investment returns, cryptoassets or online trading activity. While a nudge letter isn't a formal compliance check, it often suggests HMRC already has information it would like you to review.
Despite the name, there's usually nothing particularly gentle about the message.
A More Data-Driven HMRC
Perhaps the biggest change is how HMRC identifies potential issues.
Modern tax compliance relies far less on random enquiries and far more on data. Information from banks, employers, online platforms and overseas tax authorities can all be compared against information reported on a tax return.
As a result, HMRC investigations are increasingly being driven by data rather than suspicion. In many cases, the computer spots the anomaly before a human ever gets involved.
From Careless to Criminal?
HMRC is also consulting on proposals that would introduce a new criminal offence for reckless inaccuracies in direct tax declarations.
The government has stressed that genuine mistakes would not be criminalised. However, the proposal highlights an increasing focus on situations where taxpayers knew there was a meaningful risk that information was incorrect and proceeded regardless.
Where the line between carelessness, recklessness and dishonesty will ultimately be drawn remains to be seen, but advisers will undoubtedly be watching closely.
Keeping Your Cool
None of this means taxpayers should panic. It does, however, mean that keeping accurate records and taking reasonable care over your tax affairs is more important than ever.
Check your tax return carefully. Respond promptly to HMRC correspondence. And if you're unsure about a disclosure, seek advice before HMRC asks questions later.
While this summer's heatwave will eventually pass, HMRC's focus on tax compliance looks far less temporary.
If you require tax advice, make sure to reach out using the form at the bottom of this page
