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HMRC can enquire into any tax return and request information to establish whether that return is correct. No reasons need be given for the enquiry and will invariably not be disclosed. Regardless of the reasons for failing to declare income, HMRC has extensive means to uncover undeclared and under-reported income.
'Connect'
At the core of HMRC's investigation efforts is a powerful computer program called 'Connect'. This software analyses large quantities of data to identify fluctuations, patterns and associations between seemingly unrelated information. 'Connect' helps prioritise where HMRC should focus its time, using data to decide which cases are most worth pursuing. In the past, HMRC enquiries were often triggered by a tip-off to the department by a disgruntled employee or former spouse or were random enquiries. Now, more than 90% of enquiries are prompted by data and analysis generated by 'Connect'.
Over time, HMRC has broadened the reach of 'Connect', enabling it to automatically gather information from a diverse range of sources. These include social media, flight sales and passenger data, tax returns, the UK Border Agency, Google Street View, cryptocurrency exchanges, online payment platforms like PayPal, as well as the usual government agencies and departments such as Companies House, DVLA, the Land Registry and the DWP.
Digital platforms
Since January 2024, digital platforms across several industries have been required to share specific taxpayer information with HMRC for the first time. Previously, HMRC could request this information, but now operators must collect and verify data from sellers and submit an annual report to HMRC within set deadlines. The digital platforms include those facilitating short-term property rentals (e.g. Airbnb), private hire vehicles (e.g. Uber), food delivery networks (e.g. Deliveroo) and online private sales activity (e.g. eBay). Agencies and booking platforms are required to report data annually on or before the 31st of January following the end of the reportable period. The first report had to be submitted by 31 January 2025 to cover the reporting period 1 January 2024 to 31 December 2024. There is no obligation to report 'occasional' sellers (e.g. those who make fewer than 30 sales).
Use of AI
HMRC sees the value in AI not in collating data ('Connect' already does that) but in the software's ability to learn and analyse data. The intention is for AI to work alongside other tools such as geo-mapping (the process of taking location-based data including sales numbers, demographic info, etc), using the resulting information to create informative maps. By collating information from the various sources available, AI will analyse and assess taxpayer behaviour patterns to identify high-risk areas and individuals, allowing for a more targeted approach and ultimately saving resources and time.
New reward scheme for informants
Despite the power of computing technology, HMRC still relies on tips from individuals, such as disgruntled ex-partners and former employees, as an essential source of information. Such tip-offs can be submitted online anonymously or by using HMRC's 'tax evasion hotline', with reports that include specific information being more likely to be investigated.
Building on this, in March 2025 HMRC announced a reward scheme for 'informants' – paying cash to people who report serious non-compliance in large corporates, wealthy individuals, and offshore and avoidance schemes. Informants providing information leading to the recovery of previously unpaid tax could receive up to 25% of the extra tax raised as a direct reward. The implementation of this scheme is pending, so any rewards offered currently will be at HMRC's discretion.
Other measures
HMRC has announced other enforcement measures, including a joint initiative with the Insolvency Service to increase the use of securities in tackling 'phoenixism'. Phoenixism is the practice of carrying on the same business successively through a series of companies where each company becomes insolvent and does not pay its debts. HMRC will require upfront tax payments from these new companies, making more 'rogue' directors personally liable for their company's outstanding taxes.
Partner note:
https://www.gov.uk/hmrc-internal-manuals/international-exchange-of-information/ieim900000
Regulation 4 The Platform Operators (Due Diligence and Reporting Requirements) Regulations 2023
https://www.gov.uk/guidance/reporting-rules-for-digital-platforms
https://www.gov.uk/guidance/selling-goods-or-services-on-a-digital-platform
https://www.gov.uk/government/news/boost-for-side-hustlers-as-300000-people-to-be-taken-out-of-tax-returns-government-announces