HMRC is Watching You

The tax gap is the difference between the amount of tax that HMRC believe they should have collected and what is actually received. Closing this gap as much as possible is an obvious objective of Her Majesty’s Revenue and Customs. Importantly, the department first needs to identify where tax is owed. To aid them in this, they have been granted powers to attain information on UK taxpayers that is otherwise unavailable.

Super Software

Several years and over £100m later, HMRC has produced a supercomputer to further the gaze of its ever watchful, all-seeing eye. Named the Connect Computer System, the software mines through an enormous amount of information collected from a variety of sources to compare against the tax returns of businesses and individuals. Connect was developed in part by BAE Systems. BAE Systems is the successor company of many ground-breaking technological advancements. Predecessor companies built the Spitfire fighter aircraft; the Harrier jump jet, the world’s first operational aircraft with vertical/short take-off and landing capabilities; and co-produced the Concorde supersonic airline. Today, BAE Systems is a top 5 manufacturer in the UK – suffice to say that the company has demonstrated significant competence.

Connect operates under two parts. The integrated compliance environment (ICE) is a visualisation tool that presents data in a graphical form. This combines with the analytical compliance environment (ACE) that is used by specialist analysts to pull together profiles of high risk areas. Finding information on Connect is difficult and indeed HMRC are not particularly sharing on the way the system works. However, they have gone on record as saying the following:

‘HMRC’s Connect is a data matching and risking tool that allows HMRC to cross match one billion HMRC and third-party data items. It identifies “hidden” relationships between people, organisations and data that could not previously be identified. Connect has the capacity to highlight patterns in HMRC’s rich reserves of taxpayer and third-party data, allowing HMRC to find anomalies between such things as bank interest, property income and other lifestyle indicators. Once identified, relevant compliance action will be taken. Connect is a very powerful data tool central to HMRC’s work to close the tax gap and tackle evasion which is also being exploited to counter fraud and error in tax credits.’

Connect collects information from over 30 databases and there are more that HMRC have not disclosed, but the following is what we can be sure of:

• Tax returns (VAT, PAYE, SATR etc)
• Government agencies such as Companies House and the Land Registry
• Bank accounts and pensions
• Social media (Facebook, Twitter, Instagram for example)
• DVLA records (details of vehicles purchased and owned)
• Websites such as Amazon, eBay and Gumtree
• Insurance
• Google street view
• Council tax records
• Foreign tax jurisdictions

The purpose of the above is to build a profile against an individual. Their returns suggest they are making losses, so how are they financing that new supercar? No overseas income has been declared, but communication with foreign tax authorities suggests they received interest from an overseas bank account. Perhaps no SATR has been filed and yet Connect has detected that an individual has been trading through eBay or Amazon.

Whilst Connect is a remarkable tool at HMRC’s disposal, it is but only one of their methods to collect information on the people of the UK.

Undercover inspectors

Consider a restaurant that might engage in a large number of minor cash transactions, owners might be tempted not to declare this income. If they avoid banking the cash, and perhaps instead spend it on the finer things in life such as eating out more often, how could HMRC know? Well, that seemingly innocent, non-assuming couple that entered the restaurant were doing more than enjoying a chat and meal at the establishment. They were actually undercover HMRC inspectors there to observe the inner workings of the restaurant and identify the proportion of customers paying in cash. Whilst this is happening, an observation van might be out the front counting the number of people entering.

The above might happen on several occasions. The purpose? To establish a reasonable grounds for estimates on the level of income. Or they might check the end-of-year books to see whether the undercover agent’s purchase has been recorded at all.

Declaring cash income properly is vital – you never know who may be watching.

Informers

It isn’t just HMRC themselves that are watching, they also hugely rely on the moral fibre of the public. Well, it being a case of morality might not actually be all that true. Afterall, there is a financial incentive. Consider that in the year ending March 2021, just shy of £400,000 was paid out to informants that gave HMRC details on potential tax fraud. Having said that, HMRC have stated that the vast majority of people who notify them of potential fraud do so without expectation of any reward.

In any case, HMRC accepts tip-offs from members of the public that wish to report fraud. HMRC facilitates this with a section on their website dedicated to reporting it. On top of this, they also take phone calls on the matter.

The informer could be anyone. Imagine a case where you have an individual that is not declaring their self-employment income (perhaps they mow lawns on their weekends). It could be a neighbour that is displeased with the behaviour. Maybe the individual is boasting about it down the pub which irritates a local, who then feels the need to report the activity.

Global exchange of information

The UK is one of over 100 countries that has committed to exchange information between tax authorities to combat tax avoidance and evasion. This information (provided by financial institutions such as banks and investments companies) is exchanged automatically via the OECD’s common reporting standard (CRS).

Details of bank interest, dividends received and property sales are freely shared between countries. Should any of this income not have been declared, the taxpayer might receive a letter from HMRC in which they suggest the taxpayer might not be acting compliantly.

For those that have non-compliant overseas affairs, HMRC has the Worldwide Disclosure Facility. This allows taxpayers to disclose their tax irregularities and pay what is owed to HMRC.

As countries continue to store more compliance online, so too will it become easier to quickly exchange information – it’s becoming increasingly difficult to hide overseas income.

Public information

On top of its parliamentary given powers, HMRC also acquires information in the same way as the everyday person. They might check social media sites to gather data on the lifestyle of an individual. If someone is posting pictures of a very expensive lifestyle (sports cars or trips to Gstaad) you would expect their income reported to be of significant amounts too, generally speaking.

Any information that could assist in an investigation that is publicly available can and will be used by HMRC. Social media, land registry and Google street view are all examples of ways that they might gather intel.

Raids

If HMRC suspect tax fraud is occurring, they may begin to make arrests and raid premises. They have the power to obtain a search warrant on the condition that there is reasonable evidence to suggest that there is highly valuable information within the premises relevant to the investigation.
The raids, often referred to as “dawn raids”, gives the investigator entitlement to use reasonable force to enter the premises on presentation of a search warrant. Once in they are allowed to seize hard copies of documents and information stored on devices.

It is a criminal offence for a person to refuse the investigator entry, without a reasonable excuse, or to physically obstruct any agent that is executing the search. To do so can attract fines and imprisonment.

Big Brother

References were made to George Orwell’s Nineteen Eighty-Four character ‘Big Brother’ at the beginning of this article – a leader that wields the power of mass surveillance over his citizens. Within the novel, the residents constantly face the message “Big Brother is watching you”. Is this not the reality of HMRC’s approach? If it is an accurate comparison, the next question to ask is whether it is an abuse of power and a breach of privacy for UK citizens?

Either way, the results speak for themselves. The tax gap is closing. HMRC is watching you.

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