An article published in the Independent on 30 March prompted our consideration of how HMRC identify tax avoidance (or evasion). The article carrying the snappy header “Tax avoidance investigations up by a quarter as HMRC rakes in extra £39m by targeting the rich” identifies that “A Finance Team set up by HM Revenue and Customs to target wealthy fund managers and investment bankers”. The Independent is described as a more Liberal than Labour or Conservative newspaper and therefore it is not surprising they report on the wealthy and in particular bankers! However, HMRC are not solely concentrating on the wealthy as demonstrated by the disclosure campaigns over the past few years.
How do HMRC identify targets?
Anton Lane wrote about this and other “Practicalities of Tax Investigations” in much more detail in issue 148 (February 2015) of Tolley’s Tax Digest. The easiest starting point is Connect although the function of Risk and Intelligence Service (RIS) and the integrated departmental approach are equally important. This article considers Connect, its capabilities and how HMRC have moulded them to utilise its capabilities.
Most readers would have heard about Connect: the acclaimed and award winning software developed for HMRC by defence contractor BAE Systems. They were also responsible for other software detecting cyber-crime and financial fraud.
HMRC have not set out the specific capabilities of Connect. Instead they have actively reported what has been spent on developing it, which in itself creates the impression it must be amazing and it probably is. A reported £80m and within HMRC’s manuals they describe Connect as:
“A data matching and risking tool that allows us to cross match one billion HMRC and third party data items to uncover hidden relationships between people, organisations and data that we could not previously identify. For the first time we can see, at the touch of a button, more information in one place for a taxpayer.
Owned by Risk and Intelligence Service (RIS), on behalf of HMRC, Connect has the capacity to highlight patterns in HMRC’s rich reserves of taxpayer and third party data, allowing us to find anomalies between such things as bank interest, property income and other lifestyle indicators, and a customer’s stated tax liability.
Connect is central to HMRC’s work to close the tax gap and tackle evasion. We are using it to direct our resources more effectively, increasing efficiency and improving customer experience by improving case selection, quality and strike rate across the compliance spectrum from organised criminal attack to the identification of common errors.”
The information that HMRC have to hand includes that from:
Other government departments
Foreign tax organisations
Tax (income, corporate, PAYE and VAT) returns
Credit reference agencies
Online social networking
However the list could be more endless given the powers contained in Schedule 23 Finance Act 2011. The schedule permits requests of third party sources without notifying the group of taxpayers the request could relate to. The request can be to provide data in a specified format i.e. electronically. We will consider the possibilities a little later.
Connect isn’t directly available to all HMRC officers although it appears that all officers have the ability to make a request to an officer who does have access to Connect. HMRC’s structure has changed since the amalgamation of the Inland Revenue and Customs and Excise as well as being affected by the new technology.
To illustrate: the department for General Enforcement and Compliance includes subsidiary departments for counter avoidance, criminal investigation, risk and intelligence and specialist investigations.
Furthermore, the departments are structured to interact: Specialist Investigations includes caseworkers responsible for criminal investigations as does RIS. Specialist Investigations also sit within other departments and those officers are trained to use Connect and have access to it. So in summary, there is a big information machine and an organisation split into teams with specialisms in different areas. The big information machine is looked after by RIS who identify those to be the subject of an enquiry, investigation or which disclosure campaign to launch next.
So why do advisers or clients still believe they are randomly selected for an enquiry? Would they act differently if they knew what RIS do?
RIS do the following (which could be for corporates and individuals):
Profiling tax payers by industry sector, turnover, profitability, staff, earnings, employment, investments (including property ownership and savings), international travel and business interests.
Collating information on taxpayers which could include tax returns, accounts and other Companies’ House records, tax returns, VAT submissions, import/export declarations, employee information, property ownership or rental arrangements, insurance details etc.
Making available comparable data whether on personal or business profiles or more specific transactions.
Analysing employment records against the profile of a business.
Linking expenses or turnover of a business that imports or exports against custom declarations.
Identifying the payment of royalties and in particular where and to whom it is paid.
Collating the information from web sites such as business websites, Facebook, LinkedIn, Twitter, Pinterest, You Tube and linking it to connections – whether businesses or individuals.
Linking land and property to owners (individuals, companies, trusts, including overseas owners) as well as against registered persons for the purposes of the electoral role, council tax and benefits.
Consider the following illustrations:
Company A sells products that are supplied with an underwritten guarantee or separately insured. RIS obtain information from insurance providers (i.e. number of sales) and compare to accounting and VAT records to identify undeclared income.
Company B imports products either to sell or to create product to sell. RIS import information against the declared sales thereby permitting the potential identification of undeclared sales.
Company C has very few employees although it would be expected from other factors and when compared to industry information, that there should be more.
Person A has a certain level of declared earnings although incurs lifestyle costs taking into account dependents, mortgages and other expenditure which are not aligned to declared earnings.
Person B is a shareholder of a company which does not have significant profits although financial information illustrates Person B incurs regular lifestyle costs, receives funds into their bank or has declared income for mortgage purposes (or indeed the property is owned by someone else but not rented to them).
The above illustrations do little justice to the capabilities and it is worth noting that Connect allows information on one person or entity to be connected to others to demonstrate and unveil relationships. This functionality requires: comparing industry sector financial ratios, staff costs, VAT records, property expense, public liability insurance costs; bank deposits against a connected person. Such a connected person could be another business or a shareholder.
A shareholder’s profile could be linked allowing the following to be considered: whether married or divorced, number of dependents, maintenance costs, number and value of properties owned and when acquired, rental income and debt against properties, bank deposits, bank and credit card borrowings, investments held (stocks, shares, financial products, pension/pension investments), life/critical illness/private medical insurance taken out and cost, finance arrangements (i.e. car leases/mortgages), cars owned, whether children attend private school, Council tax, other business interests or employments (shares and directorships current and past in private limited companies/limited liability partnerships/partnerships and sole trades), inheritances received and the profiles and interests of connected persons for example that of a spouse, child, and other business partners/associates.
A considerable amount of information has always been available to the government. The amalgamation of the Inland Revenue and Customs, systematic approach to make government departments share information, increased powers to obtain information from third parties, accessibility of information across the web, ease of processing information obtained in electronic format and the development of software to process all of the above has changed the way HMRC identify risks.
Apparently, RIS considers risk on a national level rather than a local one and builds information packages to help investigators pursue enquiries. The officers working an enquiry sit within a team where they have access to someone who has access to Connect as well as specialist investigations and criminal investigators. The importance here is that RIS identify those for enquiries with considered knowledge and then officers’ work with highly trained and experienced investigators. It is therefore unlikely that an enquiry is ever random or a VAT/PAYE audit is simply routine. Why would you incur the cost if you are in the business of maximising Revenue and you can see where you are most likely to maximise it from?