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 need funding. The Autumn Budget raised taxes to help fund its plans, but we also expect HMRC to increase its attention on individuals and businesses whom they suspect may owe tax by way of a continued increase in investigations, enquiry work, compliance checks, and nudge letters.
HMRC, backed by the Government, has announced a variety of compliance initiatives revolving around their three-point strategy, to prevent, promote and respond. These include:
- 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% and being more aggressive in respect of tax geared penalties
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.
Where do we think HMRC will pay particular attention in 2025:
Crypto
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.
Research & Development (“R&D”) tax relief
For the last two years this has been a hot topic, where HMRC have cracked down on significant fraud, increased the level of scrutiny/checks of claims, and changed the rules, all resulting in a significant reduction in claims being filed. Our article in April 2023, highlights the issues HMRC were dealing with and steps taken.
HMRC now check one in five applications, compared to everyone in a hundred previously. 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.
Apart from HMRC’s interest, buyers as part of due diligence are profiling R&D claims as a high-risk area.
HMRC has set up a special R&D disclosure scheme for companies which have made excessive claims and are out of time to amend corporation tax returns. Launched on New Years Eve! Companies are eligible if they can no longer amend their corporation tax returns, need to pay further corporation tax or pay back overpaid tax credits for R&D tax relief, as well as those who have simply overclaimed the relief. Once a disclosure has been made HMRC will then decide if it will be accepted or if there is additional information needed, which will take up to 15 days. If the disclosure is accepted by HMRC, the full amount owed will also be expected to be paid within 12 months. The scheme has few disadvantages when compared to other disclosure facilities, as HMRC will not waive penalties, no protection from criminal prosecution or additional time to pay, may mean that this service is unlikely to prompt the level of response that HMRC is looking for.
Code of Practice 9 Investigations
With more information and more staff resource being allocated, 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. Not an area Harbour Key deal with, as how you engage with the process can mean the difference between criminal prosecution or moving forward with a clean slate!
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
With VAT being charged for the first time on private school fees, and a high-profile policy of the Labour Government, the area is likely to attract attention. 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.
With the increased in the risk of an enquiry or compliance check, our best advice is that consideration be given to taking out tax investigations fee insurance if a policy is not already in place, for example via membership of a professional organisation like The FSB, or via a legal expenses insurance policy. We can arrange cover with Professional Fee Protection Limited, details of which can be found HERE.
