HMRC annual report and update on compliance activity

HMRC has released its annual report and accounts for 2024 to 2025, alongside supporting statistics. This provides useful insight into HMRC’s activity over the period and key areas of focus, including which sectors and taxes are investigated most by HMRC. Overall, this illustrates a continuing focus on compliance by HMRC.

The annual report sets out HMRC’s five strategic objectives, being (i) closing the tax gap, (ii) improving day-to-day performance and the overall taxpayer experience, (iii) reforming and modernising tax and customs administration, (iv) building a high-performing organisation, with a skilled and engaged workforce and (v) supporting wider economic aims through HMRC’s work.

Key points from the report are as follows:

• Total tax revenues were £875.9bn, a 3.9% increase on the previous year.
• The tax gap (i.e. the difference between the amount that is theoretically due to HMRC and the amount that is actually collected) in 2023 to 2024 (the most recent year for which this data is available) sat at 5.3%. An estimated £48bn of tax was “protected” by tackling avoidance, evasion and error in 2024 to 2025. The foreword emphasises the Government’s commitment to closing the tax gap, noting the 5,500 increase in compliance staff and 2,400 debt management staff over the next 5 years. Taxpayers should expect continuing focus on this area, including increased compliance activity.
• 310 prosecutions were brought as a result of HMRC criminal proceedings, with a 91% success rate in achieving convictions.

The technical notes to the report and accounts include “tax under consideration” for Large Business. This details the areas of HMRC focus and risks within large businesses. Similar information is provided for Wealthy Individuals and Mid-size Business compliance. 

Perhaps unsurprisingly “international” matters are significant (£15bn for Large Business and £3bn for Wealthy/Mid-size). This continues a trend from prior years, although there has been an increase, with international representing £13.8bn for Large Business and £2bn for Wealthy/Mid-size for the prior period. Topical areas of international focus include transfer pricing, withholding tax matters and CFC issues. 

Other areas of interest are VAT legal interpretation and “boundary pushing”, employment issues and the intangible asset regime. Employment in particular has seen a significant increase in tax under consideration of c£4bn in Large Business (being £5.6bn for 2024-25 increasing from £1.7bn for 2023-24). This is reflected in practice, as we are seeing increasing compliance activity in this space across all types of taxpayer. 

Key sectors of HMRC interest include banking (£8bn), retail (£7bn), telecoms (£8bn) and pharma (£4.5bn) within Large Business. The tax under consideration in Large Business increased to £52.6bn from £44.9bn in the previous period. Wealthy and mid-sized business showed an increase also from £11.8bn for 2023-24 to £14.2bn for 2024-25. 

HMRC also released its the results of its customer surveys for 2024. As previously, a large majority of businesses rated their “appetite for risk” in terms of boundary pushing tax planning as low. Where businesses were involved in litigation, around 80% agreed that complex legislation or unclear legislation were a key factor in the dispute, around half reported that unhelpful guidance was a factor, and just under 30% that HMRC’s administration of the tax system was a factor.

A technical note on “compliance yield” was also published. HMRC states that compliance yield is the estimate of revenues that would otherwise have been lost if not for HMRC’s compliance activity and the impact of policy changes to address non-compliance.

The approach is 3-fold:

• preventing non-compliance by improving policies, services and systems
• promoting good compliance by supporting taxpayers and increasing their understanding
• helping customers get their tax affairs in order following errors and ensuring the tax system is operating fairly

HMRC plan to focus on this “upstream” compliance aiming to collect a greater proportion of tax from interventions that take place before a tax return is submitted. Upstream compliance yield increased as a proportion of total yield from 34% in 2023 to 2024 to 41% in 2024 to 2025.

The above illustrates a continued need to increase tax take and focusing on upstream compliance pre-enquiry or litigation. As taxpayers it is important to ensure that evidence is collated and retained should investigations commence. If you would like to discuss trends in tax disputes and how businesses can prepare themselves please contact the authors. CMS assists with tax disputes in many jurisdictions across the globe.