In 2026, tax compliance in the UK is entering a new, digitally‑driven era. With Making Tax Digital (MTD) for Income Tax Self Assessment soon becoming mandatory for many, and with HM Revenue & Customs (HMRC) actively targeting incorrect business expense claims, business owners face heightened scrutiny over how they classify and report costs.
In a 2024 trial, HMRC’s initial digital compliance checks reportedly generated more than £27 million in recovered tax by identifying instances where personal use had been incorrectly claimed as business expenditure. This trial outcome underscores why sole traders, landlords and small business owners must prepare for intensified reviews in 2026.
This blog explains what the crackdown means, why it matters, and how you can ensure your business stays compliant in the digital tax landscape of 2026.
What Is the HMRC Personal Expenditure Crackdown in 2026?
The HMRC personal expenditure crackdown refers to a deliberate push to identify and correct instances where taxpayers claim personal or mixed‑use costs as business expenses in their Self Assessment returns.
Rather than relying solely on traditional review methods, HMRC is increasingly using digital triggers and automated prompts to flag claims that may not meet legitimate business expense criteria. This includes warning messages within tax accounts and targeted communications reminding taxpayers of HMRC’s expectations.
For 2026, this digital enforcement is expected to be broader and more systematic, with a focus on expense classifications that historically see high error rates such as travel, mobile phone use, home office costs, and entertainment.
What Does the “Wholly and Exclusively” Rule Mean for Business Expenses?
At the heart of allowable business expenses is the “wholly and exclusively” rule: an expense is deductible only if it was incurred entirely for the purpose of earning business income.
This means:
- If an expense has any personal element, that portion must generally be excluded from the deduction.
- For mixed‑use items (like a mobile phone used for both personal and business communication), careful apportionment is required.
- HMRC expects robust evidence and a reasonable allocation method when costs are split between business and personal use.
Failing to apply this principle correctly is one of the most common triggers for enquiries into expense claims.
What Did HMRC’s 2024 Trial Reveal About Disallowed Claims?
An HMRC digital campaign and trial targeting Self Assessment returns for 2024/25 uncovered a significant amount of tax owed where personal use had been incorrectly claimed as business expenditure. The trial recovered over £27 million and prompted HMRC to signal that more comprehensive checks will follow in 2026.
Here’s what the trial highlighted:
- Incorrect apportionment of mixed‑use costs
- Misclassification of personal expense items as business costs
- Limited supporting documentation for expense claims
The takeaway for 2026 is clear: assume HMRC will check, and your records should be prepared accordingly.
How Is HMRC Using AI and Digital Data to Identify Expense Issues in 2026?
HMRC has been modernising its systems under its Transformation Roadmap, increasingly incorporating automated checks and digital analytics to identify risk patterns in tax submissions.
While HMRC hasn’t publicly detailed every tool it uses, tax professionals report that digital nudges including automated prompts and alerts within taxpayers’ online accounts are becoming more common. These are designed to highlight potentially incorrect claims and encourage voluntary corrections.
Although often referred to informally as a “data dragnet,” the system isn’t some speculative AI model; it’s an extension of HMRC’s ongoing compliance engine, which now integrates:
- Digital Self Assessment submissions
- Bank and transaction data (where available)
- Pattern‑based flagging of unusual expense claims
This doesn’t mean HMRC is reading personal social media or using non‑tax data sources but digital signals connected to tax records are increasingly important when assessing the accuracy of expense claims.
What Are the Key Making Tax Digital (MTD) Deadlines You Must Know?
One of the biggest shifts for 2026 is the rollout of Making Tax Digital for Income Tax Self Assessment (MTD ITSA).
According to HMRC, from 6 April 2026, sole traders and landlords whose combined gross income from self‑employment and property exceeds £50,000 per year must use compatible software to:
- keep digital records
- submit quarterly income & expense updates
- file their tax returns digitally
using MTD‑compliant systems.
Future phases include:
- April 2027 – threshold drops to £30,000
- April 2028 – threshold drops further to £20,000
This digital transformation is crucial because expense records will need to be maintained in real time, not just retrospectively at year‑end.
Which Expense Categories Are Most Likely to Be Flagged by HMRC in 2026?
Certain types of expenses frequently attract attention because they are often partially personal:
Mobile Phones & Broadband
If used for both business and personal use, only the business portion is deductible. You should be able to justify your allocation method.
Home Office Costs
Only the proportion genuinely used for business purposes is allowable. Simple “flat rate” allowances without evidence may be challenged.
Travel & Mileage
Business miles are allowable; private travel is not. Clear mileage logs are essential.
Entertainment
Generally not deductible for tax purposes, though client hospitality under specific conditions may be permissible.
Vehicles
Company cars and business travel must distinguish between business and private use records are key.
In all cases, evidence and reasoning matter more than arbitrary estimates.
What Should Be on Your 2026 HMRC Compliance Checklist?
To reduce the risk of an HMRC enquiry, consider the following:
Accurate Apportionment
Split mixed use items based on reliable data, not guesswork.
Digital Record Keeping
Under MTD, digital records must be maintained before report submission, not after.
Quarterly Updates
Submit correct quarterly totals, including expenses.
Consistent Documentation
Keep receipts, logs, invoices and notes linked to your digital accounting system.
Regular Review
Check your records ahead of submissions to avoid mistakes.
This proactive approach often reduces administration later if HMRC does inquire.
How Does HMRC Flag Risky or Incorrect Business Expense Claims?
HMRC uses its digital systems to identify patterns that may indicate:
- high ratios of expenses relative to income
- unusual claims compared with industry norms
- incomplete or late data submissions
You may receive notifications, prompts, or requests for clarification before an official enquiry starts. These pre‑enquiry digital nudges are designed to encourage voluntary corrections.
What Happens If HMRC Opens an Enquiry Into Your Expense Claims?
If HMRC decides there is sufficient reason, a formal enquiry may follow. Key points:
- You will be notified formally by HMRC
- You must provide supporting evidence for expense claims
- Penalties may apply if errors are careless or deliberate
- Early voluntary disclosures typically reduce penalties
Respond promptly and cooperate fully ignoring HMRC enquiries often worsens outcomes.
Can a Real‑Life Scenario Show How an HMRC Audit Plays Out?
Imagine a small design consultancy with a sole trader owner. They claimed a portion of their utility bills as a business expense using a broad proportional method without logs.
HMRC flagged this during a digital pre‑enquiry check, requesting clarification. The owner provided usage estimates but couldn’t substantiate them. HMRC made adjustments, disallowed part of the claim, and applied interest plus a penalty.
Lesson: Better evidence and realistic apportionment can prevent or minimise costly disputes.
Which Tools and Practices Can Help You Stay HMRC‑Compliant in 2026?
To manage compliance effectively:
- Use MTD‑compatible accounting software
- Keep linked digital receipts
- Maintain automatic mileage logs
- Review expenses monthly
- Consult a qualified accountant
Digital record‑keeping is not just a compliance requirement it’s a strong business practice.
Conclusion
The HMRC personal expenditure crackdown is not just a risk it’s a prompt to modernise your tax record‑keeping. With MTD transforming how expenses are recorded and reported, businesses in the UK have an opportunity to streamline compliance and reduce errors that could lead to penalties.
By understanding the rules, documenting carefully, and using digital tools effectively, you can navigate the 2026 tax landscape with confidence.
FAQs About HMRC Personal Expenditure Crackdown
What Is the HMRC Personal Expenditure Crackdown?
It’s HMRC’s initiative to identify and correct personal or mixed‑use expense claims in business tax returns.
Who Is Most at Risk in 2026?
Sole traders, landlords, and small businesses filing Self Assessment returns — especially those with mixed‑use expenses under MTD.
How Does HMRC Define Personal Use?
Personal use is any portion of an expense not directly related to generating business income.
What Records Does HMRC Expect You to Keep?
Receipts, logs, invoices and digital entries linking the cost to business activity.
Can You Correct an Error Before HMRC Notices?
Yes — voluntary corrections before an enquiry can reduce penalties.
What Happens if You Ignore an HMRC Inquiry?
Delays typically increase penalties and may lead to enforcement action.
How Does MTD Affect My Expense Claims?
MTD requires digital records and quarterly updates, increasing transparency and timeliness.