HMRC, Tax Compliance, and OSINT

HMRC’s emerging tax evasion challenge is one faced by many tax authorities. How Open-Source Intelligence (OSINT) can help

While the UK boasts one of the smallest tax gaps in the world, tax evasion is on the rise among its small businesses and online retailers, according to a recent report by the National Audit Office (NAO). The NAO audit estimates that more than £4.4 billion in tax losses from small businesses in 2022 could have been prevented; and despite HM Revenue & Customs (HMRC) efforts to address noncompliance, the rise of digital business and evolving evasion tactics have created a vulnerability for HMRC. What HMRC needs, according to NAO, is a less generalized, more focused strategy. But what does this mean, and how do tax authorities like HMRC achieve it? Let’s explore these questions in today’s blog.

The emerging problem in tax compliance

By all accounts, HMRC has had noted success in its tax compliance efforts: the UK’s tax gap is one of the world’s smallest, relatively speaking; and for the2022-23 tax year, it was estimated to be at 4.8%, its lowest yet. In fact, tax evasion rates overall are trending flat. However, small businesses remain the largest contributor to the tax gap – responsible for 81% of tax evasion, per HMRC. According to the NAO report, tax revenue lost among small businesses reached £5.5 billion last year.

Despite HMRC’s progress in curtailing tax evasion, and its ability to use of criminal sanctions as well as to name and shame promoters of noncompliant schemes, the NAO report points to opportunities for HMRC such as the need for a cross-tax strategy, the rise of “phoenix companies,” and the surge in online retail. The growth of digital businesses, especially online retailers, has made it harder to track sales and enforce tax compliance, particularly for overseas retailers who sell in the U.K. but fail to collect VAT.

The rise of eCommerce in particular has created new channels for tax evasion, where businesses avoid paying VAT or underreport their sales. About a third of all global business activity is now being conducted online, generating an estimated $1.2 trillion in the US alone in 2024, and more than 9.8 million online retailers are estimated to exist globally today. Many retailers are even eschewing the traditional bricks-and-mortar model to sell exclusively through online channels. This rapid digital transformation of commerce has created a tax compliance nightmare for authorities around the world, and it will only grow in size and complexity.  

Leveraging the digital economy to deter the evasion it enables

Tackling tax noncompliance in the digital age requires authorities to fight fire with fire. They need access to tools that pair a data-driven approach with speed and scale, enabling them to keep up with – and even get ahead of – those exploiting the digital age to evade taxes. This is where advanced platforms like IVIX help tax authorities by providing solutions based on aggregated data, automated risk assessments, and rapid in-depth analysis. Using open-source intelligence (OSINT), IVIX equips tax authorities with precise insights into true activity and unreported revenue, automatically and at scale, so they can overcome the challenges highlighted in NAO’s report. IVIX provides:

1. Better visibility into online business activity. IVIX pulls publicly available data (OSINT) from across the web, deploying advanced algorithms and in-depth analysis to provide a more accurate picture of true business activity in the digital economy. This enables authorities to:

· Identify businesses that may have an online presence but have not registered with tax authorities.

· Track newly registered companies and flag those showing suspicious activity, such as sudden closures or surges in new business registrations just before stricter regulations are implemented (as seen with Companies House).

2. Detection of “phoenix companies:” These companies that declare insolvency to avoid tax liabilities, only to restart under a new name, cost £500 million in tax debt losses in 2022-2023. With phoenixism on the rise, detecting businesses that abuse insolvency rules is vital. Using tailored algorithms and graph technology, IVIX maps relationships between businesses, their directors, and operational patterns. This enables tax authorities to:

· Identify companies that declare insolvency to avoid paying taxes and then reopen under a different name.

· Analyze networks of directors involved in multiple companies with suspicious behavior, flagging high-risk individuals for further investigation.

3. Risk scoring & prioritization: The NOA report indicates a need for a more focused strategy that prioritizes the biggest offenders. IVIX’s risk-scoring mechanism leverages OSINT to help prioritize investigations by assessing:

· Magnitude Score: Which sellers have the largest online presence, sales volume, and digital footprint?

· Compliance Status: Are sellers registered, unregistered, or late-registered, and how compliant are they with tax regulations?

By combining multiple data points, tax authorities can more effectively allocate resources to tackle the highest-risk cases first, improving the overall efficiency of compliance efforts.

4. Cross-Jurisdiction Tax Compliance: IVIX enables tax authorities to track cross-jurisdiction compliance by identifying sellers with economic or physical nexus in the UK and other countries around the world. For instance:

· Sellers who should be collecting VAT due to substantial sales into the U.K. can be identified based on web traffic, sales patterns, and customer locations.

5. Monitoring eCommerce VAT Compliance: IVIX can analyze whether online sellers are correctly collecting VAT, particularly from overseas sellers. This is crucial as online platforms like Amazon and Etsy have become hotbeds for tax evasion through underreported sales and VAT non-compliance. IVIX can:

· Track whether sellers are applying VAT and/or sales tax correctly at checkout.

· Analyze long-term patterns of noncompliance and provide HMRC with data-backed insights for enforcement.

The path forward for HMRC

HMRC has a strong track record of reducing the UK’s tax gap, and in many ways can serve as a model for other tax authorities. However, the tax compliance challenges that have emerged alongside the digital economy must be addressed quickly. By incorporating advanced data-driven OSINT solutions like IVIX into its enforcement strategy, HMRC can better identify non-compliant small businesses, combat phoenixism, and ensure that the rise of eCommerce doesn’t lead to a surge in uncollected taxes.

As the landscape of tax evasion becomes more complex, tax authorities must continue to evolve by embracing data-driven tools that provide a holistic view of compliance. Doing so will allow authorities to stay ahead of evasion schemes and protect tax revenues. Tax evasion is not a challenge that can be solved overnight, but with the right strategy and the right tools, tax authorities can better protect public revenue and ensure compliance in the rapidly evolving world of digital commerce.

Sign up to learn more about IVIX and how we support tax authorities in their efforts to combat tax noncompliance in the digital age.

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