Yesterday HMRC released its 2026 Report & Accounts. This is the annual occasion when it’s the tax authority’s turn to show its financial sums.
There’s much to dig into, but here we take a look at how HMRC’s tax compliance function is doing. And this year’s figures show that investment in tax compliance continues to be one of the best returns available to the public finances.
In 2025-26, HMRC’s ‘compliance yield’ – the amount of tax revenue protected or collected by HMRC’s efforts to make taxpayers pay the right tax – increased slightly to £50.2 billion. That represents £22 of additional revenue for every £1 spent on compliance, a return on investment that has been stable in recent years.
For a government looking to fund ambitious policy commitments while sticking to fiscal promises, these figures are a reminder that tax enforcement remains exceptionally good value for money.
But beneath the headline numbers there’s a more complicated story about how HMRC’s tax compliance efforts are changing. While headline compliance yield has increased, less actual cash is flowing into the Exchequer from compliance activity, fewer taxpayers are being investigated, and prosecutions for tax fraud remain at less than half their pre-pandemic level.
Compliance yield continues to rise
HMRC’s compliance yield increased from £48 billion in 2024-25 to £50.2 billion in 2025-26. However, most of that increase did not come from recovering more unpaid tax. Instead, it reflects a growing reliance on “upstream” compliance activity: preventing tax loss before it occurs through taxpayer education, behavioural nudges, closing loopholes and deterrence.
This ‘upstream’ effort now accounts for 42 percent of HMRC’s compliance yield, compared with 29 percent five years ago. It is now the largest category in HMRC’s compliance yield figures. Much of this is estimated rather than directly observed. HMRC says more than half of upstream operational yield – some £8.2 billion – comes from the assumed deterrent effect of successful litigation, although it is unclear exactly how these future behavioural effects are measured.
Cash expected…or not
The rise in compliance yield is not matched by the amount of cash HMRC expects to collect. Annual “cash expected” from compliance activity fell from £14.2 billion in 2024-25 to £12.1 billion in 2025-26. Although a small number of large settlements increased last year’s figures, compliance cash revenues remains below its pre-pandemic level.
That would matter less if HMRC were demonstrably preventing more non-compliance before it occurred. Yet this sits uneasily alongside the UK’s tax gap, which last month was revised upwards by £6 billion. If more tax loss is being prevented, it is difficult to explain why the overall tax gap continues to grow, unless increases in tax dodging are themselves outpacing HMRC’s growing ‘upstream’ compliance.
Fewer checks, fewer prosecutions
Compliance checks are the starting point of finding underpaid tax: HMRC’s initial inquiry into a taxpayer’s tax return or tax credit claim, when HMRC’s systems identify potential errors or inaccuracies. HMRC carried out 306,000 compliance checks in 2025-26, down from 333,000 the previous year and still well below the 361,000 undertaken before the pandemic.
Criminal enforcement also remains subdued. HMRC prosecuted 300 tax fraud cases during the year, slightly fewer than in 2024-25.
We should be careful about reading too much into year-on-year changes here. Tax fraud cases are complex, multi-year, and take time to reach fruition. Likewise HMRC is not responsible for the court system backlog that has lowered prosecution rates across the justice system (though charging decisions themselves are also down).
And the amount of tax collected through criminal investigations rose by 39% to £2.1 billion, suggesting that the Fraud Investigation Service may be tackling larger and more serious cases – though again, a small number of large cases can lead to large year-on-year variations in these figures.
Nonetheless fewer criminal charges and prosecutions inevitably raise questions about HMRC’s ability to deter deliberate tax evasion. There were more people prosecuted last year for fishing offences than for tax fraud.
HMRC has set a new target to “increase the number of annual charging decisions for
the most harmful fraud to 600 per year by 2029-30”. On current numbers that may be a stretch.
Progress on small business compliance but there’s more to understand
A clear success in this year’s figures is HMRC’s performance on small business compliance. Compliance yield from small businesses increased by £4 billion to £11.8 billion. Given that HMRC estimates small businesses account for nearly two-thirds of the UK’s £60 billion tax gap, this represents significant progress in tackling what they estimate is the single largest source of unpaid tax.
However, this work remains resource-intensive: large numbers of small wins across millions of businesses. HMRC estimates it costs around 7 pence to recover or protect each additional pound of tax from small businesses, compared with just 2 pence for large businesses.
HMRC still has relatively little evidence about which sectors or behaviours are driving the problem of small business non-compliance – in part because its latest estimate of the giant small business tax gap is built on examining just 337 tax returns out of a population of more than 5 million small business taxpayers. More granular information is crucial to allow compliance resources to be targeted more effectively.
Following the data
Yesterday’s figures reinforce two conclusions.
Investment in HMRC compliance continues to produce exceptional returns. Few other areas of public spending generate over twenty times as much revenue as they cost.
Beneath the headline success, though, the active pursuit of tax cheats and non-compliant taxpayers seems to be falling. Compliance cash receipts remain below pre-pandemic levels, fewer compliance checks are being made, and if you cheat on your taxes it remains vanishingly unlikely that you’ll be prosecuted.
Preventing non-compliance, rather than just chasing it after the fact, can be potentially cost effective. But as HMRC’s emphasis has shifted towards prevention in the last 7-8 years, the tax gap has actually grown.
The challenge is therefore not simply to spend more on compliance, but to ensure those resources are directed where they can have the greatest impact. That means understanding better what the biggest threats to the tax system are, and precisely what they look like. We shouldn’t be driven by political noise about vape shops: we need data and strategy.
Photo: Gdstream/Flickr CC BY 2.0
