HMRC's £45 million intelligence database putting innocent tax-payers at risk of investigation
HMRC’s investment in a £45 million database that collects in information from multiple sources may now be starting to pay off, as the organisation starts using it to pinpoint areas and types of businesses where underpayment of tax is a problem. However, there is also a risk that this is resulting in innocent taxpayers being targeted for investigations. The powerful computer system, launched 3 years ago is said to hold more data than the British Library.
As well as helping HMRC to identify broad groups where underpayment of tax may be more common, in order to scrutinise them more closely, the agency also uses it to identify individual suspects. To do this, it draws data from multiple public and private sources, including: banks, local councils, the Driver & Vehicles Licensing Agency, insurers, hospitals, online sales and purchases records, and even social media.
The use of data from banks allows HMRC to keep track of an individual’s savings and spending, or a business’s sales and investments. If these are out of kilter with the income or profits stated on their tax-returns, it raises a red flag to the Revenue. Through access to the Land Registry database the system also holds details of every property bought in the UK. This has proved instrumental in the Revenue’s recent crackdown on buy-to-let landlords.
It is reported that HMRC uses social media to build up a more detailed picture of an individual’s lifestyle. For example, social media boasts about expensive cars or even holiday pictures could trigger an enquiry if they do not fit with the individual’s reported income. Data on E-commerce transactions is the latest addition to HMRC’s information arsenal. HMRC uses the information to identify high volume traders making significant undeclared revenue through auction and community selling websites like eBay and Etsy. This strategy has been highlighted by the criminal conviction of an eBay trader who failed to pay tax on over 500,000 items he sold on the auction website. Use of the database is an example of the highly aggressive approach taken by HMRC to identify underpayment of tax.
Not all of those targeted may be guilty of tax evasion. Individuals and businesses may find themselves on the receiving end of a mass mailshot from HMRC asking them to review their taxes simply because they fit a particular profile. More unwelcome still, they may even find themselves singled out for a full investigation on the basis of a snippet of information for which there is a straightforward explanation
One of the unfortunate side effects of being self-employed is that, no matter how well you handle your tax affairs with your accountant, you are more likely to be the target of a tax investigation by HMRC. Careers where high levels of self-employment are typical are frequently scrutinised by HMRC’s tax evasion taskforces. These specialist units apply a high level of scrutiny into the tax affairs of individuals within relevant professions that HRMC thinks may be at high risk of potential tax evasion, with recent examples including plumbers, medical professionals including consultants and dentists, solicitors and Ecommerce traders.
Self-employed people operating in a sector being examined by a HMRC compliance taskforce may only find out when they are notified of an investigation. HMRC frequently chooses not to announce which business area it is looking at next so that it can surprise its targets.
The intense scrutiny applied by HMRC’s taskforces is so high that even innocent taxpayers may get caught up in a worrying and expensive tax investigation. The cost of defending an investigation can be very high, even for taxpayers whose tax affairs are in order. With innocent self-employed people at a higher risk of a tax investigation, insurance that covers the costs associated with a tax investigation can provide peace of mind over the high costs of defending an investigation.
Details of our Tax Investigation Service are currently being offered to our business clients with our 2015/16 cover commencing from 1 April 2015. Premiums start from as little as £125 net for businesses and only £55 net for personal tax clients.