HMRC is increasing large company tax probes in 2025 because it believes more unpaid VAT is being missed by large and medium-sized businesses.
HMRC opened nearly 12,000 VAT investigations last year, up by almost one-third, as it tries to close the UK’s £47 billion tax gap.
For your business, this means even routine VAT errors, late payments or unclear tax treatment could now attract greater scrutiny from HM Revenue & Customs.
Key points you need to know:
- HMRC VAT investigations into large and medium-sized companies rose from 9,071 to 11,894.
- Almost one in three large businesses faced a VAT probe.
- HMRC is using better digital systems and data matching to identify errors faster.
- Complex VAT rules, especially for food, drink and cross-border trading, are increasing the risk of mistakes.
- Businesses that prepare early and respond quickly are more likely to reduce penalties and disruption.
Why Is HMRC Focusing More on VAT Than Other Business Taxes in 2025?
HMRC is focusing more heavily on VAT because it believes this is where some of the largest and quickest tax losses are occurring. While corporation tax and payroll remain important, HMRC estimates that unpaid VAT now represents one of the biggest parts of the UK tax gap.
The VAT gap rose to £11.9 billion in the latest figures, compared with £8.9 billion the previous year, making it one of HMRC’s main enforcement priorities. Large businesses are receiving particular attention because VAT mistakes in bigger organisations often involve much larger sums of money.
A single error in the treatment of imports, food products, digital services or intercompany transactions can lead to millions of pounds in underpaid tax.
HMRC also believes VAT is easier to investigate using modern data systems. By comparing VAT returns with company accounts, customs records and payroll information, it can identify unusual patterns far more quickly than with many other taxes.
What Is the HMRC Tax Gap and Why Does It Matter to Large Businesses?
The HMRC tax gap is the difference between the amount of tax HMRC expects to collect and the amount that is actually paid. In 2023–24, the UK tax gap stood at £46.8 billion, equal to 5.3% of all tax owed.
HMRC believes that reducing this figure is essential because unpaid tax affects public spending, creates an unfair advantage for non-compliant businesses and increases pressure on companies that already pay the correct amount.
For large businesses, the issue matters because HMRC increasingly sees them as the quickest route to recovering more tax.
Large corporates handle a substantial share of UK tax revenues, and even a small VAT mistake can involve millions of pounds. HMRC collected around £337 billion from large businesses in 2024–25, so the authority believes stronger oversight in this area can make the biggest difference.
The VAT element of the tax gap has become particularly important. HMRC estimates that the VAT gap increased sharply, rising from £8.9 billion to £11.9 billion in the latest figures. This has pushed VAT to the centre of HMRC’s compliance strategy.
The tax gap matters to your business for several reasons:
- HMRC is more likely to open investigations into larger businesses with complex VAT arrangements.
- Even an accidental error may be treated as a compliance risk.
- Businesses in sectors with difficult VAT rules are more likely to be reviewed.
- Future investigations are expected to become more frequent and more detailed.
Which Businesses Are Most Likely to Face an HMRC VAT Investigation?
Not every company faces the same risk of an HMRC VAT investigation. HMRC is concentrating its resources on businesses where it believes the largest tax losses could occur.
This means larger companies, businesses with complicated VAT arrangements, and organisations operating in higher-risk sectors are now far more likely to be investigated.
Why Are Large and Medium-Sized Companies Being Targeted More Often?
Large and medium-sized businesses are being targeted more often because HMRC believes they represent the greatest opportunity to recover underpaid VAT. Almost one in three large companies had a VAT investigation opened during the past year.
HMRC tends to focus on businesses with an annual turnover above £200 million or companies with complex tax structures, even if their turnover is lower.
The authority is especially interested in companies that:
- Trade internationally
- Operate across several divisions or subsidiaries
- Use complicated VAT grouping arrangements
- Handle high volumes of transactions
- Have a history of previous VAT corrections or late filings
Certain sectors face greater attention because VAT rules are harder to apply correctly. Food, drink, retail, hospitality and digital services businesses often deal with products or services that do not fit neatly into standard VAT categories.
As Bryn Reynolds of Pinsent Masons explained,
“With a VAT gap in the billions of pounds, large and midsized businesses are facing a high level of scrutiny from HMRC. The stakes are high, not just in terms of potential assessments, but also regarding reputational and operational risk.”
What Triggers an HMRC Investigation Into a Large Company?
An HMRC investigation is usually triggered when the authority spots unusual patterns, inconsistencies or behaviour that suggests VAT may have been underpaid.
HMRC increasingly compares information from VAT returns, corporation tax records, payroll data and third-party sources to identify issues.
Common triggers include:
- Repeated mistakes in VAT returns
- Large or unusual VAT repayment claims
- Sudden changes in turnover or VAT liability
- Persistent late VAT payments
- Differences between company accounts and VAT submissions
- Unclear treatment of imported goods or overseas sales
- Uncertain tax treatments reported by the business
Large businesses may also face investigation if HMRC believes they are “pushing the boundaries” of VAT law by adopting an aggressive interpretation of complex rules.
Ed Saltmarsh from the ICAEW said HMRC’s improved systems now give
“investigators a much richer picture of trading activity than was previously available”.
That means even small discrepancies that might once have been missed can now be detected far more easily.
How Is HMRC Detecting Unpaid VAT More Quickly Than Before?
HMRC is now identifying unpaid VAT faster because it has far more data available than in previous years.
Instead of relying mainly on paper records or random checks, HMRC can compare information from multiple sources in real time. This allows investigators to identify risks earlier and focus on the businesses most likely to have made mistakes.
How Are HMRC Data Matching and Digital Systems Changing Investigations?
HMRC increasingly uses data matching technology to compare information from:
- VAT returns
- Corporation tax submissions
- Payroll and PAYE records
- Company accounts
- Import and export declarations
- Banking and third-party data
When the figures do not match, HMRC may open a compliance check or a formal investigation. For example, if a company reports much higher sales in its accounts than in its VAT return, the difference may be flagged automatically.
The introduction of digital tax reporting has also changed the way investigations work. Through Making Tax Digital and other online reporting systems, HMRC now receives more frequent and more detailed information from businesses. Instead of waiting until the end of the year, investigators can review transactions much earlier.
HMRC is also using more sophisticated risk analysis tools. These systems identify patterns that may suggest underpaid VAT, such as unusual repayment claims, repeated amendments to VAT returns or unexpected changes in trading activity.
Businesses with cross-border transactions or multiple subsidiaries are often highlighted because their VAT position is harder to monitor manually.
The authority’s “hands-on” approach to large businesses is becoming more intensive. HMRC’s large business directorate now collects significantly more additional tax than it did a few years ago, and it continues to expand its focus on high-risk cases.
Ed Saltmarsh described the change clearly when he said HMRC now has
“a much richer picture of trading activity than was previously available”.
That richer picture comes from combining digital reporting, external data and advanced analysis rather than relying on a single VAT return in isolation.
Why Are Businesses Being Flagged Even When Errors Are Unintentional?
Many businesses are being flagged even when they did not deliberately underpay VAT. HMRC recognises that most errors are caused by misunderstanding or applying complex VAT rules incorrectly rather than by fraud. However, the authority still expects larger companies to take reasonable care and maintain strong internal controls.
A company may trigger an investigation even if it has acted honestly.
Common examples include:
- Applying the wrong VAT rate to a product
- Recording sales in the wrong VAT period
- Misunderstanding whether a service is exempt or standard-rated
- Failing to keep enough supporting evidence
- Making repeated calculation errors in large transaction volumes
Food and drink businesses are especially vulnerable because the VAT rules in these sectors are often difficult to interpret. Emma Rawson from the Association of Taxation Technicians noted that VAT remains confusing even decades after famous disputes over products such as Jaffa Cakes.
She said:
“It’s over 30 years since the famous VAT case which looked at whether a Jaffa Cake is a biscuit or a cake, but we still see bizarre cases cropping up in this area.”
HMRC is also less willing to accept that repeated errors are accidental if a company has already been warned or has access to professional tax advice.
Larger businesses are expected to:
- Review VAT decisions regularly
- Keep detailed records
- Train staff properly
- Seek advice when rules are unclear
In practice, this means a business can face investigation even when there is no intention to avoid tax. HMRC is increasingly focused on whether the company took enough care to get the VAT treatment right.
Why Has VAT Become So Difficult for Large Businesses to Get Right?
VAT has become more difficult for large businesses because the rules are increasingly detailed, technical and often open to interpretation. Large companies frequently sell different products, operate in multiple countries and use complex supply chains. That makes it harder to decide which VAT treatment applies.
Which VAT Rules Commonly Cause Problems for Large Companies?
Several VAT rules regularly create problems for large businesses.
The most common areas of difficulty include:
- Food and drink products with unclear VAT status
- Mixed supplies where one sale includes different VAT treatments
- Partial exemption rules
- VAT on international trade and imports
- Digital services supplied across borders
- VAT grouping between related companies
- Intercompany charges and shared services
Food and drink remain particularly problematic because small differences in a product can change its VAT treatment completely. A product may be zero-rated in one situation but standard-rated in another.
Cross-border trade is another major source of confusion. Since Brexit, many businesses have had to deal with new import VAT rules, customs declarations and different treatment for sales inside and outside the UK. Companies that operate internationally may also need to consider foreign VAT systems as well as UK rules.
Large businesses often struggle with internal transactions too. If several subsidiaries share staff, property or technology, the company must decide whether VAT should be charged between them. These decisions can become complicated quickly and may attract HMRC attention if handled incorrectly.
What Recent Examples Show How Complex VAT Rules Can Be?
Recent legal disputes show how difficult VAT can be, even for experienced businesses and advisers. One of the most famous examples is the long-running case about whether a Jaffa Cake should be treated as a cake or a biscuit. Cakes are usually zero-rated for VAT, while chocolate-covered biscuits are standard-rated.
More recently, a tribunal considered the VAT treatment of giant marshmallows. The case focused on whether people were more likely to eat them as confectionery or roast them over a fire. The tribunal even used a mathematical formula to decide how the product should be classified.
These cases show that businesses are not always dealing with clear rules.
In some situations, there may be:
- Confirmed rules that HMRC expects every business to follow
- Proposed changes or reforms that have not yet happened
- Ongoing disagreements where the courts are still deciding the correct position
For your business, the key lesson is that uncertainty does not protect you from investigation. If the VAT treatment is unclear, HMRC still expects you to seek advice, keep evidence and show that you made a reasonable decision based on the rules available at the time.
What Happens During an HMRC Large Company Tax Probe?
If HMRC opens a VAT investigation, the process usually begins with a letter explaining what information it wants to review. In many cases, HMRC starts with a compliance check rather than a full investigation. However, if concerns remain, the enquiry can become more detailed and last for several months.
HMRC may ask your business to provide:
- VAT returns
- Sales and purchase invoices
- Contracts and accounting records
- Internal emails or explanations of VAT decisions
- Evidence supporting unusual VAT claims
Investigators often compare the information against the data HMRC already holds. If something does not match, HMRC may ask follow-up questions or arrange a meeting with your finance team.
The enquiry normally moves through several stages:
- Initial contact and information request
- Review of records and supporting evidence
- Further questions or interviews
- A decision on whether additional VAT is owed
- Possible penalties or settlement discussions
A routine compliance check does not automatically mean HMRC believes your business has done something wrong. In many cases, HMRC simply wants clarification. The earlier you respond, the easier it is usually to resolve the matter before it becomes a larger dispute.
What Penalties Could Your Business Face If HMRC Finds Unpaid VAT?
If HMRC finds that your business has underpaid VAT, it can require you to pay the missing tax, interest and an additional penalty. The final amount depends on whether HMRC believes the mistake was careless, deliberate or concealed.
Businesses may face:
- Repayment of the unpaid VAT
- Interest is charged from the date the VAT should have been paid
- Late payment penalties
- Further penalties if the records were inaccurate or incomplete
In the latest figures, HMRC issued around 582,000 late VAT payment penalties worth £302 million. That was higher than the previous year, showing that HMRC is now taking a tougher approach to businesses that pay late or fail to correct errors quickly.
Penalties are usually lower if your company tells HMRC about the error before the authority discovers it. Businesses that cooperate fully, provide records quickly and show they took reasonable care can often reduce the amount charged.
To reduce the risk of penalties, your business should:
- Disclose errors voluntarily
- Keep accurate and complete records
- Document why VAT decisions were made
- Seek specialist advice where rules are uncertain
HMRC generally takes a stricter view if it believes the business ignored warnings or repeatedly made the same mistake.
What Should You Do If HMRC Contacts Your Company About a VAT Investigation?
If HMRC contacts your business, the most important thing is not to panic. An enquiry does not always mean serious wrongdoing has taken place. In many cases, HMRC simply wants clarification about a VAT return or a particular transaction.
You should respond calmly and gather the documents HMRC has requested as quickly as possible. Review the issue carefully before replying and make sure your explanation is supported by records.
Start by collecting:
- Relevant VAT returns
- Invoices and contracts
- Internal notes about the VAT treatment used
- Any advice previously received from accountants or tax advisers
It is often sensible to seek professional advice early, especially if the issue involves complex VAT rules or a large amount of money.
For example, a retail company that discovered it had applied the wrong VAT rate to imported goods reduced its penalty by notifying HMRC immediately and correcting the error before the investigation progressed further.
How Could HMRC Large Company Tax Probes Change in the Future?
HMRC tax probes are likely to become more frequent, more targeted and more data-driven over the next few years. The government has already announced plans to recruit 5,500 additional compliance staff and 2,400 debt management staff to strengthen enforcement.
This means businesses can expect:
- More frequent VAT reviews
- Faster identification of errors
- Greater focus on large and multinational companies
- More detailed requests for digital records
HMRC is also likely to rely increasingly on artificial intelligence and advanced data analysis to identify unusual behaviour. Businesses with international structures, uncertain VAT positions or repeated filing errors may face even greater scrutiny.
At the same time, there are growing calls for wider VAT reform because many businesses and advisers believe the current rules are too complicated. Any future reforms may simplify some areas, but for now HMRC’s message is clear: businesses are expected to get VAT right and prove that they have taken reasonable care.
Conclusion
HMRC large company tax probes are increasing because the authority is under pressure to recover more unpaid VAT and reduce the UK’s growing tax gap. Large and medium-sized businesses are now more likely to face scrutiny, especially if they operate in sectors with complicated VAT rules or have unusual transaction patterns.
For your business, the biggest risk is no longer deliberate tax avoidance alone. Even honest mistakes, late payments or unclear VAT treatment can now trigger an investigation. HMRC’s stronger digital systems mean it is easier than ever for the authority to identify discrepancies.
The best protection is preparation. By keeping accurate records, reviewing VAT decisions regularly and seeking advice when rules are unclear, you can reduce the risk of an enquiry and limit the impact if HMRC does contact your business.
FAQs
Can HMRC investigate a company even if it made an honest VAT mistake?
Yes, HMRC can still investigate if it believes the company did not take reasonable care when applying VAT rules. Honest mistakes may reduce penalties, but they do not always prevent an enquiry.
How long does an HMRC VAT investigation usually last?
A simple HMRC compliance check may take a few weeks, while a larger investigation can continue for several months. Complex cases involving multiple years or international transactions often take longer.
Does HMRC only investigate very large companies?
No, HMRC can investigate businesses of any size, but large and medium-sized companies are currently receiving more attention. This is because larger businesses often have more complex VAT arrangements and bigger financial risks.
Can your business reduce a penalty after an HMRC investigation?
Yes, penalties can often be reduced if your business cooperates fully and provides records quickly. HMRC may also lower the penalty if you disclose the error before it discovers it itself.
What records should you keep in case HMRC contacts your company?
You should keep VAT returns, invoices, contracts, import records and explanations of why certain VAT decisions were made. Good record-keeping makes it easier to respond and prove that your business acted reasonably.
Are late VAT payments more likely to trigger an HMRC probe?
Yes, repeated late VAT payments can make HMRC more likely to review your business. The authority often sees ongoing late payment as a sign that there may be wider compliance issues.
Could HMRC tax probes become more common in the future?
Yes, HMRC investigations are expected to increase as the authority hires more compliance staff and uses more advanced data analysis. Businesses with complicated VAT arrangements are likely to face even greater scrutiny in future.
