It is said that death and taxes are the only two things certain in life. Whilst a very morbid phrase, it unfortunately rings true in respect of taxation and HMRC’s policing of the UK tax system.

The new Labour government has now set out its stall, making a range of spending commitments that will inevitably need funding. The Autumn Budget raised the UK’s tax liability by 2.2% of GDP, or £40bn in real terms. These tax rises are part of the puzzle of how the government will fund its ambitious plan, but we also expect HMRC to increase its attention on individuals and businesses whom they suspect may owe tax to the Treasury. In 2025, this increased compliance activity will touch upon a range of areas.

HMRC’s ambition

HMRC has announced a variety of compliance initiatives revolving around their three-point strategy, to prevent, promote and respond. This includes investing in additional compliance and debt management staff, modernising debt management IT systems, and increasing the late payment interest rate charged by HMRC on unpaid tax liabilities by 1.5%.

From HMRC’s perspective, the return rate on compliance activity is £22 for every one pound spent, hence the increase in investment.

The compliance strategy is centered around closing the tax gap – the difference between the tax actually collected and the amount which theoretically should be collected. In the latest published figures the tax gap was estimated as 4.8% (£39.8bn) and is attributed to error, avoidance and abuse, which HMRC is aiming to tackle.

As part of this compliance drive, HMRC aims to recruit 5,000 compliance officers. Additionally, the access to higher quality data means that compliance activity through enquiries and interventions will be mostly information led, rather than at random, which was historically the case for a large number of enquiries.

Crypto assets

Crypto asset owners have recently been the target of nudge letter campaigns, a trend that will continue in 2025. Historically, nudge letters relating to crypto assets reminded owners of their obligation to report transactions, but the current communications go a step further.

Crypto exchanges have been reporting user information to HMRC, meaning it now has specific information relating to taxpayers who have made a disposal, which it has compared to their tax filings or lack thereof.

Therefore, if you receive a nudge letter it means HMRC has a specific concern that an insufficiency of tax has been paid, based on information it has received.

R&D tax relief enquiries

HMRC has been casting a wide net over research and development (R&D) claimants, now checking one in five applications, compared to every one in a hundred previously. As HaysMac managing partner, Natasha Frangos, said recently: ‘There is a real risk that the handling of some R&D tax relief claims is undermining the government’s own policy to support investment here in the UK, we should be removing hurdles to innovation, but this is hindering rather than helping.’

In particular, HMRC seems to be targeting software development, which nowadays touches a number of industry sectors. In many cases, such compliance checks are made without appearing to review or reference the submitted R&D supporting information.

Even more troubling for clients, last year HaysMac supported a client providing online e-learning software, defending their R&D work against a HMRC R&D enquiry.

But there is some light at the end of the tunnel, both in terms of HMRC’s approach, and also a reduction in what felt like a deluge of fresh enquiries.

COP 9 investigations

The result of these changes and heightened HMRC activity will mean more enquiries and investigations, and inevitably an increase in Code of Practice 9 (COP 9), the most serious civil investigation type as this is HMRC’s top compliance tool, which carries the threat of a criminal prosecution.

How you engage with the process can mean the difference between criminal prosecution or moving forward with a clean slate. We have previously published our top tips for dealing with a COP9 enquiry.

Increase to National Minimum Wage (NMW)

In April 2025, the national minimum wage (NMW) is due to increase to £12.21 per hour. HMRC is likely to strongly police this area, particularly in checking the NMW is correctly applied and also challenging the status of off-payroll workers.

VAT on private school fees

For school terms starting 1 January 2025 onwards, VAT is being charged for the first time. Already we have heard about several creative approaches to tackling this and expect HMRC to monitor these closely to ensure the payments adhere to the rules in force.

Other trends  

At the Public Accounts Committee on the work of HMRC, several trends and changes were highlighted by the panel, led by Sir Jim Harra, the outgoing permanent secretary and chief executive of HMRC.

This included the roll out of generative artificial intelligence (AI) in processes such as summarisation of calls, quality assurance processes, complaints handling and more.

Additionally, the HMRC app usage increased by 64% this year, used by nearly four million people, a trend that looks set to continue. And whilst HMRC has been actively reducing the amount of telephone contact it has with taxpayers in favour of digital services, it has confirmed there are no plans to close the helplines.

 

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