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Where does HMRC get its information from?

With tax revenues down and a significant budget deficit arising from the Covid-19 pandemic, it will not come as a surprise to learn that HMRC are looking to undertake more enquiries into taxpayer’s affairs than ever before. For example, HMRC has a specialist ‘Offshore Co-Ordination Unit’ department staffed with analysts, technical tax experts and experienced investigators.

However, not only persons with offshore interests can attract HMRC’s unwanted attention. The ability of HMRC’s Connect database to identify links between businesses, shareholders, properties, families and across different government departments is increasing in its sophistication such that anyone who has not declared all of their income could become subject to an enquiry; the majority of cases (over 90%) are initiated by information and analysis generated by Connect. Therefore if a request for information is received, it is more than likely that HMRC already has some information indicating non declaration for which the taxpayer’s input or confirmation is required. If non compliance is found penalties can reach 100% of the amount undeclared plus interest.

The reason for the enquiry will always fall into one of the following three categories:

– where some figures on the tax return do not match with other information HMRC has at their disposal
– A late submitted return (enabling a longer enquiry time), or
– HMRC has received a ‘tip off’.

Possible leads

HMRC obtain its information from various sources feeding into HMRC’s Connect computer programme which incorporates analytical tools using analytical methods. The software looks for keywords or phrases such as ‘luxury holiday’ or ‘business’ on social media sites, checking names, phone numbers, addresses with information declared on tax returns submitted. Discrepancies can lead to an investigation.

For example, the Land Registry is one of the prime sources for enquiries into landlords and second homers tax affairs. Information is checked against voting and other Local Authority registers, identifying not only purchasers of properties but also whether the properties have been let. If the properties have been let but nothing is shown on the tax return (even if a loss is made the income still needs to be declared but not if the property income is less than £1,000) that may result in HMRC sending out an enquiry letter. Information can also be obtained from letting agents who can be issued with a notice to provide details of gross rents received for clients in a tax year, on a per-property, per-client basis. Even information obtained from a local authority Planning Department showing the purpose of a property acquisition can be checked. If a purchase is shown to have been made and an application made for improvements subsequently, then this could be seen as renovation before letting. Interest-bearing accounts opened to take the income from lettings, for example, are a source of information for HMRC, as are details of insurance receipts.

Online platforms/intermediary sites such as Airbnb, eBay, or building trades ratings/listings are reviewed as well as credit reference agency data and applications to mortgage providers. Google Maps is known to be a source of information for HMRC investigators. The site is used to assess whether a taxpayer’s property and lifestyle are consistent with the level of declared earnings (e.g. a new car parked outside a property or a large extension pictured that does not support the income declared on a tax return). Businesses set up during the pandemic (possibly from home) that advertise predominantly on social media but have not been declared on the 2020/21 and/or 2021/22 tax returns may also be of interest to HMRC. The usual cash businesses such as private taxi firms, pubs, corner shops and takeaways are vulnerable to enquiry but anyone not declaring all of their income could receive an enquiry letter.

‘Deliberate Defaulters’

Taxpayers with undeclared income of more than £25,000 who have received penalties for deliberate errors in their tax returns or for deliberately failing to comply with their tax obligations are termed ‘Deliberate Defaulters’. Such taxpayers have their name and address published online.

Practical point

Consider purchasing Tax Investigation insurance which will pay your accountants fees should you be subject to an enquiry.

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