In the 2024/25 tax year, HMRC conducted 255,000 compliance investigations into small businesses and individuals and recovered a record £6.3 billion in unpaid tax — an average of £24,700 per case, up 23% from the £20,100 average the year before.
HMRC has also created a dedicated Small Business Evasion Team within its Fraud Investigation Service, employing approximately 350 specialists focused exclusively on smaller enterprises. A new whistleblower reward scheme, introduced in November 2025, links financial rewards directly to the amount of tax recovered from tip-offs rather than drawing from a fixed budget. And HMRC is now formally consulting on proposals to introduce a new criminal offence for reckless inaccuracies in tax declarations — not just deliberate fraud, but situations where a taxpayer knew there was a meaningful risk their information was wrong and proceeded regardless.
The tax gap — the difference between the tax HMRC believes should be collected and what it actually receives — widened from 6% of total tax liabilities in 2023/24 to 6.4% in 2024/25. The corporation tax gap has been stubbornly around 18% since 2019/20. And HMRC's own analysis attributes 35% of the overall gap to failure to take reasonable care — not evasion, not avoidance, but straightforward mistakes.
The message from all of this is clear: HMRC has more data, more technology, more staff dedicated to SME compliance, and a higher financial incentive to pursue enquiries than at any point in recent memory. And roughly 60% of the overall UK tax gap comes from SMEs.
How HMRC Finds You: The Connect System
The era of random enquiries is largely over. Approximately 93% of HMRC investigations are now triggered by specific data signals, not random selection. HMRC's Connect system cross-references information from more than 60 sources simultaneously: bank transaction data, Land Registry records, Companies House filings, social media, online selling platforms, estate agent data, mortgage applications, school fee payments, vehicle finance agreements, overseas bank accounts, and the RTI payroll data that employers submit each month.
From January 2024, HMRC began receiving annual income data from digital platforms — eBay, Vinted, Airbnb, Etsy, Just Eat, and others — under the OECD's Digital Platform Reporting rules. By January 2026, HMRC had run its first full cycle of this data against 2024/25 Self Assessment returns. Where the platform income and the declared income do not match, a nudge letter or compliance check follows automatically.
The specific triggers HMRC is most actively monitoring in 2026 include:
Lifestyle inconsistencies. Where declared income cannot plausibly support observed spending — mortgage payments, school fees, vehicle finance, overseas holidays visible on social media — Connect models the gap and flags it for review.
Payroll and benefits discrepancies. HMRC's RTI data from employers is matched against corporation tax returns and director self-assessment declarations. Where a director's reported company drawings do not reconcile with the company's declared profits, this is a high-priority flag. Benefit-in-kind reporting (or the absence of it) is a specific current focus.
VAT mismatches. Where turnover declared on VAT returns differs from income on a corporation tax return or self-assessment filing, this difference is automatically highlighted.
Missing MTD registration. From 6 April 2026, sole traders and landlords with gross income above £50,000 are required to use MTD-compatible software and submit quarterly updates. HMRC has confirmed that failure to register for MTD when required is itself being treated as a compliance risk indicator and can trigger a check.
Late or amended filings. Frequent amendments to tax returns, consistent late filing, or a pattern of filing close to deadlines are all signals that Connect weighs.
The New Penalty Landscape From April 2026
The financial cost of getting things wrong has also increased. From 1 April 2026, the late filing penalty for Corporation Tax has doubled: missing a filing now attracts a £200 penalty (previously £100), rising to £400 if still outstanding after three months. It has been 25 years since CT late filing penalties were last meaningfully updated.
The broader penalty framework for tax errors is unchanged in structure but is being applied more strictly:
For offshore matters, penalties can be significantly higher. And where HMRC determines that an error crosses the line from carelessness to recklessness under the proposed new criminal offence, the stakes rise further.
The Nudge Letter: What It Is and What to Do
The most common first contact from HMRC in 2026 is not a formal enquiry letter under section 9A TMA 1970 — it is a nudge letter, formally called a "One to Many" letter. These letters are sent in large batches to taxpayers whose data profile raises a flag. They are pre-enquiry documents: they are not investigations, and they carry no formal legal obligation. But they are emphatically not to be ignored.
A nudge letter typically tells you that HMRC believes you may have income or gains that have not been correctly declared, and invites you to review your position and come forward if anything is wrong. Responding by confirming that everything is correct when it is not — or ignoring the letter entirely — transforms an administrative matter into a deliberate non-disclosure, attracting much higher penalties.
The correct response to a nudge letter is to contact your accountant immediately, carry out a genuine review of the relevant period, and if there are any errors or omissions, disclose them voluntarily through the appropriate HMRC channel before the enquiry escalates.
What a Compliance Health Check Looks Like
A tax compliance health check is not an admission that something is wrong. It is a proactive review — by your accountant, not by HMRC — of the areas most likely to attract scrutiny, carried out on your terms and at your pace. Typical areas covered include:
- Director's loan account position and whether any benefit-in-kind or CT charge applies
- Expenses claimed through the business and whether they would withstand a "wholly and exclusively" test
- VAT returns reconciling to corporation tax returns
- Employment status of any contractors or self-employed workers engaged by the business
- P11D accuracy or payrolling of benefits
- Personal assets (property, investments, vehicles) that may give rise to unreported income or gains
If your records are in order, a compliance health check gives you confidence. If they are not, identifying and correcting the issue before HMRC does results in significantly lower penalties and no adverse tax coding changes.
A Final Note on RTI and Payroll Accuracy
One of the clearest and most actionable things a small employer can do to reduce investigation risk is to ensure payroll is filed accurately and on time. Every month, your PAYE Real Time Information submission lands in HMRC's systems and is matched against every other data source HMRC holds on your company and its directors. Discrepancies between your RTI data and your corporation tax return or director self-assessment filings are one of the most common triggers for SME compliance checks in 2026.
Concerned about your compliance position or want to understand your investigation risk? CoreAcc offers tax health checks for businesses across Hertfordshire and North London. Contact us today.
This article was last reviewed in July 2026. It does not constitute legal or professional advice.
