New Frontiers in Tax Compliance: How HMRC is Uncovering Hidden Income
HMRC’s Expanding Investigative Powers
Her Majesty’s Revenue & Customs (HMRC) has significantly strengthened its ability to detect unreported or “invisible” income. While it has always had the right to enquire into any tax return without giving a reason, the scope and sophistication of its tools have grown. Whether income is deliberately concealed or unintentionally missed, HMRC now has advanced systems to identify irregularities and underreporting.
The Role of ‘Connect’: HMRC’s Data Supercomputer
At the centre of HMRC’s efforts is a powerful data analytics system known as ‘Connect’. This tool analyses huge volumes of data to detect anomalies, trends, and relationships that may indicate tax evasion or avoidance. Previously, investigations were largely prompted by tip-offs or random selection. Now, more than 90% of HMRC enquiries are initiated by data flagged by Connect.
Connect collects and processes information from a vast network of sources, including:
- Social media activity
- Travel bookings and flight data
- Google Street View and satellite mapping
- Cryptocurrency transactions
- PayPal and online payment services
- UK Border Agency, DVLA, Land Registry, and Companies House
- Department for Work and Pensions (DWP)
The system cross-references all this data to spot mismatches between reported income and observed lifestyle or behaviour, allowing HMRC to focus its resources where the risk is highest.
Mandatory Reporting by Digital Platforms
From January 2024, digital platforms operating in the UK have been legally required to collect, verify, and report seller data directly to HMRC. This includes platforms like Airbnb, Uber, Deliveroo, and eBay.
Under the new regulations, these platforms must submit annual reports by 31 January for the preceding calendar year. For example, the first reports—covering the period from 1 January to 31 December 2024—are due by 31 January 2025. These rules aim to improve transparency and compliance in the growing gig and sharing economies.
There is, however, an exemption for occasional sellers, defined as individuals making fewer than 30 sales a year.
Integrating AI for Smarter Audits
Beyond Connect, HMRC is now investing in artificial intelligence (AI) to enhance its analytical capabilities. While Connect gathers and organises data, AI will be used to identify behavioural patterns, predict risk, and support decision-making.
AI will also be used in conjunction with geo-mapping technology, creating visual data maps that highlight trends in sales, income, and demographic information. This targeted approach enables HMRC to investigate more efficiently and effectively.
Financial Incentives for Whistleblowers
Despite the technological advances, human input remains critical. HMRC continues to receive useful information through its anonymous tip-off hotline and online forms.
To further encourage informants, HMRC announced a new reward programme in March 2025. This scheme aims to incentivise reports of serious tax non-compliance among large companies, wealthy individuals, and offshore entities. Informants whose tips lead to the recovery of unpaid taxes may be eligible for a reward of up to 25% of the tax recovered. As of now, reward amounts are at HMRC’s discretion, pending full implementation of the programme.
Cracking Down on ‘Phoenixism’
HMRC is also working closely with the Insolvency Service to curb phoenixism—the practice of repeatedly setting up new companies to avoid paying taxes and debts. Under new enforcement measures, directors of such companies may be required to make upfront tax payments and could be held personally liable for unpaid taxes. This initiative aims to prevent abuse of insolvency procedures and promote accountability.
Final Thoughts
HMRC is entering a new era of tax enforcement. With the support of powerful technologies like Connect and AI, alongside strengthened regulations and reward schemes, the department is better equipped than ever to detect hidden income and ensure tax compliance. For taxpayers, the message is clear: transparency and good record-keeping are no longer optional—they are essential.
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