HMRC’s information gathering leaves no stone unturned

These days, if you are targeted by HMRC with an enquiry into your affairs, it is unlikely to be random. HMRC use a very wide range of sources in order to obtain information about taxpayers who have either made mistakes on their tax returns or purposely under declared their income.  What are the different ways in which they gather intelligence?

Third party information

Successive legislation introduced over recent years has significantly increased the powers HMRC have available to them to obtain information from official third party sources. They can for example, request information on taxpayer activity from businesses, financial service providers, credit card companies, medical insurance providers, professional bodies and government agencies.

Having access to Land Registry data or DVLA records, means that HMRC are able to see exactly how much someone has paid for a property, or which vehicles are registered to a particular taxpayer. Then, if tax return information does not correspond with their lifestyle and purchases, for instance if someone is registered as living in an expensive home and owning an expensive car, but is declaring a lower than expected income, questions may be asked. Professionals can also be targeted in this way, for instance it may be suspected that a medical consultant is under declaring income, based on patient claim forms submitted to an insurance company.

In addition to official sources, HMRC also receive a lot of useful information from unofficial third party sources. These can range from ex-spouses, neighbours and relations to former employees – it is likely to be someone with a grudge. Whilst this information may not be used exclusively, it can form part of a wider enquiry, supported for example by other data.

Mystery shopping

HMRC inspectors are well known for their mystery shopping habits; working undercover and targeting businesses that are likely to process a high volume of cash transactions – for example independent retailers, restaurants and hairdressers. Their approach typically involves buying a service from a business, paying for it in cash and then requesting access to accounting or VAT records at a later date in order to check whether the transaction was properly accounted for.

Social media

Since social media such as Facebook and Twitter have become mainstream, they have become a source of very useful information for HMRC. For example, photos of extravagant holidays on Facebook can be used to support allegations of discrepancies between declared income and expenditure. Even some of the ‘stars’ of ‘My Big Fat Gypsy Wedding’ were investigated after HMRC spotted that the money they were spending on family weddings was far in excess of their official earnings.

The Internet

The Internet provides a wealth of information, ranging from activities on eBay to actual browsing history. HMRC have confirmed they use Google Street View as a way to monitor taxpayers’ properties without having to physically visit a property. Google Street View is useful because can indicate whether, for example, a taxpayer is undertaking expensive home renovations; it is also a possible means of seeing what cars are parked on a driveway. Although this information is unlikely to be used in isolation, it helps to frame an overall picture which may be required to form part of a larger investigation.

IT Systems

So far we have outlined various sources of HMRC’s information, but the most powerful element in their toolkit is Connect, a new ‘big data’ IT system that is able to bring together the various sources we have highlighted to profile taxpayers. In addition to imported data, the system mines information by ‘spidering’ the Internet and then uses mathematical modelling to build a profile of a taxpayer and match it against what they are reporting on their tax returns.

This has certainly transformed the capabilities of HMRC to identify potential targets on a grand scale as opposed to the previous necessity to go through everything manually, using local inspectors with local area knowledge. Connect works by sifting through seemingly unrelated information from sources such as those described above and matching this information against property transactions at the Land Registry, company ownerships, loans, bank accounts, tax returns and employment history.

Data found is then matched with standard ‘profiles’ of individuals based on their profession, age and other demographic information, in order to highlight those  who may be under-declaring, or not declaring income. Note the emphasis on ‘may’, because in spite of having such sophisticated software to identify potential targets, HMRC do sometimes choose the wrong people for enquiries. For this reason it is always advisable to seek professional advice if you are the subject of an HMRC enquiry, before discussing it with HMRC directly. Equally if you think you have underpaid tax and wish to make a voluntary disclosure, discuss it with a tax advisor first to ensure you fully understand the implications.

Armed with this information, taxpayers should take heed and ensure they are keeping detailed financial records and accurately informing HMRC of their income. If you would like help with your tax affairs or you are concerned that you may be targeted by HMRC, please contact Anne Eager by emailing ae@rjp.co.uk