UK Tax Gap Narrows as HMRC Modernizes Enforcement Capabilities

The UK tax authority, HM Revenue & Customs, has released some eye-catching information about its performance in closing the “tax gap,” improving day-today performance, and modernizing tax administration.

Its March 12 report shows that HMRC efforts produced a £24.2 billion ($32 billion) compliance yield over nine months in 2025 and 2026, and prevented £8.5 billion of tax losses. These results are likely to support the continuation, and possible expansion, of this approach.

So what does this mean in practice for those doing business in the UK? It means that HMRC’s increased enforcement capacity and focus on improving tax compliance among large corporates creates a complex compliance landscape that businesses will need to navigate carefully.

Large Business Focus

The compliance yield is a result of proactive HMRC investigations into taxpayers’ affairs. HMRC has a vast array of information-gathering powers it uses to obtain evidence from taxpayers and third parties such as financial institutions and online platforms.

In line with the government’s objectives, HMRC efforts appear to be concentrated on large corporates with annual revenues exceeding £200 million. This is because, according to the National Audit Office’s report on the taxation of large businesses, tax loss attributable to individual large companies is substantially greater than that arising from smaller businesses, despite smaller businesses generally showing lower compliance levels.

Around two-fifths of the UK’s tax revenues flow through large businesses, and HMRC collected £337 billion in taxes from them in 2024-25. This includes corporation tax, payroll taxes and value-added tax. From HMRC’s perspective, a focus on large businesses is clearly justified.

Even when the tax risk relates to smaller taxpayers, HMRC is increasingly adept at shifting the compliance burden onto large business. This has been apparent in changes in recent years making end users—typically big businesses—responsible for policing individual contractors who freelance (often via a personal company or specialist employment business) but essentially operate as employees of the end user.

Elsewhere, digital platforms have been under a duty to report certain customer data to HMRC. The theme has been the same—to move the compliance obligations and the tax risk onto larger businesses.

The increased scrutiny of large corporates is reflected by enforcement activity. HMRC currently has more than 2,000 investigations open against large companies, and 636 penalties were issued to large businesses in 2024-25, compared with 164 penalties issued in 2021-22.

Impact on Multinationals

First, the likelihood of tax disputes arising is going to increase. Historically, in relation to large companies, HMRC has relied primarily on close engagement to identify compliance risks rather than on data profiling, which has underpinned most of the compliance activity across other HMRC customer groups.

This approach was attributed to the limited effectiveness of data profiling for large corporates, largely because of HMRC’s constrained IT capabilities. However, in line with the government’s priorities, HMRC has now received £1.6 billion to modernize its IT infrastructure, which is likely to enhance risk assessment and lead to more large corporates targeted for detailed scrutiny.

HMRC’s report also showcases that once a compliance issue has been detected and a dispute has arisen, HMRC has both the resources and the appetite to pursue it. HMRC’s litigation success rate has remained consistently high over the last five years, rising from around 86% in 2020-21 to over 90% in recent years, with First-tier Tribunal success rates exceeding 92% in 2024-25.

This has made HMRC more confident about protecting tax revenue in tribunals and courts, although there is an inevitable element of spin in these statistics. The figures will be skewed by the fact that not every dispute is litigated, and many of the cases that do reach a tribunal or court are small matters often involving unrepresented taxpayers.

Second, disputes are likely to become more resource‑intensive and costly, internally and externally. As HMRC becomes better able to identify specific tax compliance issues, taxpayers can expect more targeted and granular information requests, making detailed audit trails increasingly important.

HMRC draws heavily on the UK’s wide network of information-sharing channels with other tax authorities across the globe. This increases the lines of enquiry that HMRC explores and adds further delay and complexity to HMRC investigations.

Third, timelines remain a material risk from a business management perspective—HMRC investigations into large corporates take many months, sometimes years, to conclude. This has been a factor driving interest among large businesses in the growing tax risk insurance market, as a way to manage the uncertainty while disputes are resolved.

Looking Ahead

Businesses with exposure to the UK should act now to ensure that their audit trails are robust and complete. This not only will assist in managing potential HMRC’s investigations but also may prove critical if a dispute progresses to the tribunal, where the evidential burden of proof will be on the taxpayer.

If the above analysis paints a bleak picture of the UK as hostile compliance environment, it shouldn’t. At its best, HMRC can be pragmatic and open minded. A well-advised taxpayer will work to navigate with the Revenue through the volumes of information HMRC has gathered and explain the commercial context.

This is especially important for complex cross-border businesses, where HMRC might be less familiar with the sector or specific circumstances that affect businesses in non-UK locations and markets.

Where a dispute can’t be resolved, taxpayers have recourse to a specialist tax tribunal service and shouldn’t hesitate to use it in appropriate cases.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Matthew Greene is a partner with Stewarts, specializing in resolving complex tax disputes across all the main UK taxes.

Mikolaj Kudlinski is an associate in the tax litigation and resolution team with Stewarts.

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