HMRC: Tax audits of UK's biggest companies hit five-year low

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The number of big UK companies being investigated by tax authorities for unpaid tax has fallen to its lowest level in five years, according to official data collected under freedom of information laws.

The tax authority has historically investigated around half of the UK's 2,000 largest companies at any one time, but FOI figures released by HMRC show that the number has been steadily declining in recent years, with around 790 companies investigated in the 2022-2023 tax year.

In 2021-22, HMRC investigated 820 large businesses – typically those with an annual turnover of over £200 million or those with an annual turnover of less than £200 million but complex tax issues – compared to around 900 in 2020-21, around 980 in 2019-20 and around 990 in 2018-19.

The tax agency is focusing its resources on maximizing effectiveness and collecting more taxes from big businesses, and said last year's compliance efforts brought in $1.6 billion more than in 2018-19.

The report added: “The potential value of our large corporate cases continues to grow, demonstrating our resolve to ensure that large corporations pay the taxes they owe.”

Analysts said a number of factors had driven the overall decline in investigations, including the agency’s suspension of investigations into companies and individuals during the pandemic. Pressure on HMRC’s resources, which MPs have criticised for underperformance, also had an impact.

Investigations into large companies require HMRC’s most qualified and experienced investigators, and demand for them is high but supply is limited, according to Ray Grove, head of corporate tax and trade at Thomson Reuters, the content and technology company that submitted the FOI request.

Don Register, head of tax dispute resolution at accountancy firm BDO, said HMRC's resources were limited and increasing its capacity would increase overall revenue in the long term.

Labor pledged in its election manifesto to invest an extra $855 million a year in the tax authority to reduce tax avoidance.

But despite the challenges, tax experts say they largely agree that HMRC is using its current resources to drive compliance efforts more effectively for larger businesses.

The Register said that despite a decline in the number of investigations, it was focusing its efforts on cases with higher stakes, according to HMRC's annual report for 2023-24.

She noted that compliance revenues, an estimate of the tax revenue that would have been lost in the absence of compliance activities by tax authorities, increased by $1.6 billion from $9.8 billion in 2018-19 to $11.4 billion in 2023-24.

Investigations are also being completed more quickly, with the average investigation taking 36 months in 2022-23 but being completed within 21 months in 2023-24, according to HMRC’s annual report.

“Even a one-time apparent decline in real-time surveys could actually be a sign of positive progress,” said Andrew Park, a partner at accounting firm Price Bailey.

He said the new notice on uncertain tax treatment had helped HMRC decide which large companies to investigate and had acted as a major deterrent.

The legislation came into effect under the previous Conservative government in April 2022, but it also covers transactions that occurred before then, so large businesses will need to notify HMRC if their tax situation is uncertain and they are unsure of the correctness of their position.

MP Park said the bill aimed to close the statutory interpretation tax gap, which was originally estimated at around £6bn in 2019-20 but has since been reduced to around £4bn. The tax gap is the difference between HMRC’s estimate and the amount actually paid, and was £39.8bn in 2022-23.

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Park said that before the law was introduced, some big companies acted recklessly, making elaborate and optimistic claims to lower their tax bills.

Tax experts say they expect scrutiny to increase in the current parliamentary session as the Labor government vows to crack down on tax avoidance and evasion to raise the money needed to deliver on its promises.

Jake Landman, tax partner at law firm Pinsent Masons, said HMRC will always be focused on getting the best return on investment, which means there will be more scrutiny of big companies.

He added that investigating even minor disagreements between tax authorities and companies could result in huge amounts of additional taxes and fines.

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