HMRC tax investigations have been ratcheted up since the end of the Covid-19 support from central government. This comes as no surprise as the Treasury are driving HMRC to reduce the tax gap or what is fast becoming the tax debt mountain. The mountain of debt grew during the period of covid aided by the introduction of the Bounce Bank Loan (BBL) scheme. The BBL scheme would soon be considered by fraudsters as a free money scheme. This is evidenced by the numerous fraudulent BBL applications that have been uncovered post covid. HMRC has recently achieved its first successful BBL scheme criminal prosecution.

In addition, since April 2022, HMRC has introduced some new checks targeting taxpayers in certain sectors deemed high risk of evasion due to the proliferation of cash transactions. Consequently, minicab drivers, taxi drivers and scrap metal merchants had to confirm to HMRC that their tax affairs was compliant before they were able to renew their licences from the local licensing authorities. Any license holder with underpaid taxes or not compliant were subjected to a loss of their licence and the risk of criminal prosecution. Although, HMRC expects this new approach to save some [270m of tax evasion over the next five years. The saving of [54m pa is miniscule when benchmarked against the f32bn tax gap.

Maybe it is this miniscule impact on the tax gap that leads errant taxpayers and fraudsters to ask rhetorically, “how will they (HMRC) find out?” The truthful answer is, it is not a question of finding out but why should taxpayers not be compliant?

HMRC has a variety of information sources to identify, undeclared income, including Connect its sophisticated software. However, HMRC don’t need recourse to Connect in many cases because most taxpayers lack any form of sophistication and are just awaiting HMRC detection. Some basic HMRC approaches include:

  • Social media observation or roaming
  • Information from other government departments
  • Information from relatives or the general public
  • Business investigation

The sad reality is most taxpayers lack the sophistication, skills and financial resources to outwit HMRC. A common example of deliberate non-payment of taxes arises from residential property landlords who let out their property via an estate agent.

Many of these landlords are oblivious to the fact that letting agents make an annual return to HMRC identifying landlords, rental properties and income earned. Moreover, some letting agents even itemise this service on their monthly statement to landlords. Despite this, landlords are super confident they can outwit HMRC. These landlords are paying their letting agent to report them to HMRC but they believe they are untouchable.

In addition, there are the landlords who are obsessed by paying cash to tradespeople, to avoid 20% VAT. They often receive a nasty shock when they are advised by their accountant that without a receipt for the transaction, it is not being accepted. Suddenly that saving of 20% VAT has cost them additional income tax.

In addition to undisclosed property income seven common pathways into a HMRC tax investigations are:

  1. Tax return related matters – tax return filed late, tax paid late, or errors on tax return
  2. Material inconsistencies and/or variations on comparative tax returns
  3. Reported income and expenditure seemingly inconsistent for its business sector
  4. Life-style and reported tax returns being inconsistent
  5. The existence of offshore bank accounts
  6. Taxpayer operating in a HMRC deemed high-risk sector, such as cash orientated
  7. HMRC has received third party information about the taxpayer

Taxpayers should not assume that a tax investigation means they have committed a tax offence. Similarly, it does not mean HMRC are right in their assertion or findings.


Therefore, taxpayers should seek professional advice as soon as they are formally notified of a HMRC tax investigation.