The use of incentives to encourage "whistleblowers" to alert tax authorities to bad behaviour might sound like a good idea, but beware the "Law of Unintended Consequences."

In her Spring Statement, UK Chancellor Rachel Reeves set out tax enforcement measures. However, HM Revenue & Customs (HMRC), the tax authority, has caused controversy over its plans to reward whistleblowers. Drawing comparisons to systems in the US and Canada, the proposed scheme would see insiders paid a percentage of the tax recovered based on their tip-offs. As Niall Hearty, partner at law firm Rahman Ravelli says in this article, this reward for whistleblowers is a bold step that could shake up the UK’s approach to tackling tax evasion, but it will only succeed if HMRC has the resources, expertise, and coordination to act effectively on the information it receives.

The editors of this news service are pleased to share these views; the usual editorial disclaimers apply. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

In a bold move by HMRC, those who provide tip-offs about serious tax avoidance by companies and the wealthy could be in for a windfall.

HMRC is planning to give insiders who provide such tips a slice of the tax money that it claws back as a result. Under a government proposal, HMRC is due to begin a reward scheme for informants later this year; with the aim of targeting corporates, wealthy individuals, offshore and tax-avoidance schemes.

The government is portraying the move as one of a number of measures aimed at cracking down on tax evasion and the architects of the schemes that enable many to sidestep tax obligations. These measures, formally announced in Chancellor Rachel Reeves’ spring statement, include hiring more HMRC compliance staff, strengthening HMRC’s pursuit of debts and looking at how to improve tax collection. The aim is to close the tax gap and raise an extra £1.055 billion a year by 2029-30. 

Taken individually, each of the measures seems understandable. But the move to reward whistleblowers is the boldest.

Based on programmes that are run in the US and Canada, the scheme would see informants receiving an amount of money based on a percentage of the taxes recovered due to the information that they provided. The precise formula for calculating such pay-outs has yet to be disclosed.

But the idea is set to become a reality. 

It should be emphasised that HMRC already pays informers, although this is done on a discretionary basis and the rewards have not been on a par with those paid out in other countries. It has been reported that nearly £1 million ($1.32 million) was paid out between 2023 and 2024 which, while a large amount of money in its own right, is dwarfed by other figures that could be cited in reference to the UK’s tax system. 

To take just one figure, HMRC estimated that tax evasion cost the UK £5.5 billion in lost revenue in 2022-23. And less than two months ago, the Public Accounts Committee (PAC) said that this figure is likely to be a significant under-estimation of the true figure. 

The report published at the time by PAC painted a picture of a tax system riddled with loopholes that led to fraudulent behaviour going unchecked – a situation made worse by little collaboration between HMRC, Companies House and the Insolvency Service. It went as far as to say that there was a lack of an all-important strategy for combatting tax evasion and a need to give public bodies more powers to address fraud.

Whether a formal system of paying informants can do much to put right those wrongs – or at least reduce their damaging effects – remains to be seen. The number of prosecutions arising from HMRC criminal investigations has dropped by more than a half in the past five years or so. This is a trend that could be slowed or halted if a paid informant system gathered momentum. But any information passed to HMRC in this way would only be of value if it brought results. And that may come down to HMRC’s staffing, resources and, ultimately, its expertise. And that may be the nub of the problem.

HMRC has, arguably, been the subject of more official criticism in recent years than any other public body. There seems to be a recognition – at least from outside HMRC – that things need to change. Paid whistleblowing appears to be a part of that change. But if it is to be a change for the better, HMRC will have to show that it can act effectively with the information it pays good money to receive. 

If that proves to be the case, it would be a notable step in the right direction in the battle against tax dodging. It may be some way off the comprehensive anti-tax evasion strategy that many want to see (and believe is necessary) but it would at least be an improvement. But if it does not bring the hoped-for results, it will intensify the calls for major reform of the system.

Money, as has often been said, can be a great motivator. In an ideal scenario for HMRC, the scent of cash being offered for tax tip-offs would lead to individuals coming out of the woodwork and providing it with a steady stream of valuable information that would see it making inroads into the problems it faces over non-payment of tax. But if such a policy of enticement did not bring the desired information – or it was unable to make effective use of it – HMRC might find the final whistle being blown on how it goes about its own business.