400 new tax investigators to monitor self-employed: Protect yourself with this simple banking move

HMRC tax investigations under the Labour Party will see a surge in tax investigations, it has been reported. The HMRC has hired 400 extra compliance officers after inquiries into the tax affairs of the wealthiest Britons yielded more than £1.5 billion last year.

Alongside more tax investigations to handle the Treasury’s tax gap, HMRC’s use of its powers to access personal banking data could also rise, putting some freelancers and sole traders at risk for messy investigations.

Random checks increase HMRC investigations

HMRC conducts random audits across all taxpayer categories, though self-employed individuals face higher selection rates than employees.

Investigation triggers include late filing, industry comparisons, and whistleblower reports. Lifestyle inconsistencies with reported income also prompt reviews.

Separate accounts demonstrate professional business management to HMRC whilst reducing suspicion during routine checks. Business accounts make expense claims easier to verify and defend, keeping personal transactions private unless specifically relevant to investigations.

This separation also simplifies Self-Assessment preparation, reduces accounting errors and creates fewer investigation triggers through cleaner records.

HMRC can access your banking activity

In some cases, HMRC can now access a freelancer’s bank accounts without their permission using Financial Institution Notices (FINs). Since 2021, FINs have allowed HMRC to access information from financial institutions about taxpayers, going directly to your bank to request information about your finances. The powers apply to all self-employed individuals, including freelancers and sole traders.

Before FINs, HMRC had to ask for permission from you or a judge to access this information but not anymore.

Joe Phelan, Business Finance expert and commentator at Money.co.uk tells The Freelance Informer: “If you earn more than £1,000 from self-employment in a tax year — even from a side hustle — you need to register for Self-Assessment and file a tax return. HMRC doesn’t automatically monitor your bank accounts, but if they open an investigation and believe it’s justified, they can request your bank records directly from your provider, without needing your permission.

“While that might sound alarming, there are safeguards in place to protect your data, and these powers are only used when there’s a valid reason,” said Phelan. “Still, if you’re mixing business and personal finances in the same account, it can potentially make things messier. Using a separate business account isn’t a legal requirement for sole traders, but it could make your finances easier to manage and keep any HMRC scrutiny far simpler to deal with.”

Online platform reporting increases detection risk

HMRC expanded its reach further from January 2024, asking big online platforms, such as eBay or Airbnb, to start reporting the earnings of their users.

The new reporting system helps HMRC identify unreported income streams. Freelancers using multiple freelancer platforms and other revenue streams could face increased detection risks as income reported by platforms gets cross-referenced with tax returns. Any discrepancies could trigger automatic investigation alerts within HMRC’s systems.

HMRC is also increasingly using lifestyle analysis to identify potential tax evasion. Bank account activity forms a crucial part of these lifestyle assessments. Mixed personal and business accounts make analysis more intrusive, as investigators examine all transactions when accounts combine personal and business finances. This includes family spending, personal purchases, and private financial arrangements.

Sole traders most exposed

Sole traders face particular vulnerability during HMRC investigations. Because there’s no legal distinction between you and your business as a sole trader, you’ll need to pay particular attention to your tax returns.

If you end up being investigated by HMRC, your personal assets could be at risk if you haven’t kept accurate records to demonstrate your business income and expenses.

Mixed accounts make HMRC investigations far more intrusive. Personal spending then becomes subject to scrutiny.

Separate accounts provide clear evidence of business versus personal expenses whilst creating clear audit trails for legitimate expenses. This protection becomes vital during formal investigations, reducing investigation time and limiting personal exposure.

Banking experts therefore, strongly recommend dedicated business accounts for all self-employed workers. Separation protects both privacy and financial security.

Implementation steps for freelancers

Opening a business account requires minimal documentation for sole traders, with most banks offering dedicated self-employed account packages. It does, however, sometimes get frustrating when wanting to change bank accounts, as the process can be lengthy and inconvenient. Nonetheless, you could be paying less and getting so much more when you shop around.

Things to consider:

• You can transfer direct debits and standing orders for work-related expenses to business accounts whilst keeping personal finances completely separate.
• Regular transfers from business to personal accounts create clear salary trails, to show legitimate income extraction from business activities.
• Enhanced HMRC powers arguably make account separation essential rather than optional for modern freelancers.

Want to open up your first business account or look for one that better serves your needs and budget? Compare business bank accounts here and check out Trustpilot reviews of business bank accounts below.

Trustpilot score of Business Banks UK

Monzo: Trustpilot average review score: 4.5 out of 5

ANNA: Trustpilot average review score: 4.3 out of 5

Revolut: Trustpilot average review score: 4.3 out of 5

Starling: Trustpilot average review score: 4.2 out of 5

Tide: Trustpilot average review score: 3.9 out of 5

Zempler: Trustpilot average review score: 3.7 out of 5

HSBC: Trustpilot average review score: 2.8 out of 5

Barclays: Trustpilot average review score: 1.8 out of 5

Lloyds: Trustpilot average review score: 1.6 out of 5

Natwest: Trustpilot average review score: 1.5 out of 5