HMRC’s top ten ‘big brother’ checks on your tax affairs.
Her Majesty’s tax inspectors relentlessly pursue those they suspect of submitting a fabricated tax return. As the Treasury puts more pressure on HMRC to recoup more tax, they are increasingly using a greater variety of sneaky beaky tactics to pursue their suspicions.
Here’s a top ten list showing some of the tools used by HMRC which go beyond just your receipts and bank statements.
- Informers
In the tax year to April 2011 HMRC paid £309,620 to informers according to Reynolds Porter Chamberlain, the city law firm. This increased by 21% in the year to April 2012. These sums reflect the fact that informers provide the Tax Office with essential information which usually leads to the largest amounts of money. These rewards for information are not fixed at a percentage of the amount of tax recovered. But they are only paid once the claims are investigated and proven to hold fruit for the Tax Office. Informants can make themselves from hundreds of pounds to thousands.
There are many reasons why people rat out others to HMRC. The more understandable are divorcees or ex-employees exacting revenge for a perceived slight. Others feel more underhand, such as reporting someone’s conversation in a pub or a high level of cash-in-hand work.
HMRC seem to have changed their dealings with people snitching on others. Andrew Watt of Watt Busfield explains, “When I was a revenue inspector we used to get regular letters naming people. If they were anonymous we tended to throw them away. Today, the Revenue keeps this information on file and uses it to cross reference to other information about that individual.” This more sinister attitude is attributed to the higher pressure that is being applied to HMRC to raise more money through taxes.
So – be very wary of where and with whom you discuss your financial matters!
2. Raids on private property.
In the tax year 2011-12, tax inspectors raided 499 homes of people they suspected of not paying tax. According to Pinsent Masons this is an increase of 155% on the previous year.
These considerable powers can only be used in certain circumstances and are being focused on people who run a business from home. It is being reported by accountants that they are targeting anyone who failed to use “Disclosure opportunities” to declare income – mainly lawyers, teachers, plumbers and doctors.
HMRC are proud of their ‘success’ saying, “We are already seeing positive results from these increased investigations and searches: during 2011-12 criminal investigation activities resulted in 545 individuals being charged and 413 being convicted, with a success rate in court of 92%.”
The most worrying statistic of all is that HMRC have a target to achieve five times more criminal prosecutions by the 2014-15 tax year.
3. Mystery Shoppers
This involves tax inspectors working in undercover teams, in disguise, to carry out investigations on businesses. For example, posing as a couple out for a meal in a restaurant and then seeing if their bill has been properly recorded in the restaurants books. Or going in for an ‘ordinary’ haircut in order to check out how the salon is operating.
Andrew Watt is a partner at Watt Busfield tax investigations and explains how far reaching these secret surveillance tactics can be. “On the same night as these mystery shopping exercises, inspectors are also likely to have an observation van carrying photographic equipment outside the business, counting the number of people going in or out. If they have seen 150 go in, but the books only account for 100, they could have a case of fraud against the business.”
Restaurants are a particularly fertile ground for HMRC because there is a high volume of small value cash transactions taking place. Also, if cash tips are just taken by wait staff then the employer has not applied income tax and national insurance to that amount as they are required to.
4. Information on computer systems.
It is the plurality of this point that makes it so powerful. HMRC has access to a range of databases and systems throughout the UK such as Companies House, the Land Registry and the electoral role. “We have more data than the British Library”, boasts Mike Wells, the director of risk and intelligences services at HMRC.
In 2010 HMRC paid £45 million to BAE Systems for their new Connect computer system. Put simply, this system automatically analyses a mass of seemingly unrelated information in 26 databases to identify connections that were previously impossible to find. This mathematical technique is called social network analysis and removes the cloak of invisibility from determined fraudsters. By 2011 this system had earned the Treasury £1.4 billion, as reported by the National Audit Office.
Connect speeds up the investigation process exponentially and 6 out of 10 inquiries in HMRC use it to get information. There are 3,000 expert Connect analysts working with tax investigators in the UK.
The modern technology combined with access to the variety of Britain’s databases means that HMRC can check the details on any tax return easily and speedily. For example, around 200,000 of the 300,000 paper inheritance tax returns claim that their estate is under the taxpaying threshold. Using Connect, all of the possible pieces of necessary information are found and analysed to reveal where estates are under-declaring. This raised £26 million in inheritance tax in its first year.
5. Other public information.
From the ‘old-school’ newspaper to the new Twitter and Facebook sites, the tax office doesn’t miss any opportunity to find information about suspect taxpayers.
They are looking for a mismatch between a person’s lifestyle and their declared income. And, if they have reason to suspect you, they consider all of the places they can get information. For example, there are reports that several people were caught after publically spending thousands on massive weddings on ‘My Big Fat Gypsy Wedding’ whilst not declaring in income. It has also been reported that individuals have been caught out by HMRC after they posted pictures of an expensive holiday on Facebook.
Even a local newspaper story of a wedding can lead HMRC to question the father of the bride about how he could afford it when his declared earnings are much less.
6. Fiddling the books!
HMRC have a new equation to deal with this enduring problem. It is called the ‘chi squarred’ test of ‘Benford’s Law’. It is a way of testing the randomness of a set of figures presented to HMRC. It is based on the theory that the number one is the first digit 30% of the time in any data and that there will be less frequency of larger numbers. As people submitting deliberately fraudulent books are unlikely to know of this theory, they will probably give themselves away by not fitting the pattern.
There is some argument against this tool though. Derek Allen is a tax director with ICAS and said it was a “pseudo-scientific” argument as he questioned the logic that a restaurant’s results should be random.
7. Good, old-fashioned, guilt and fear.
HMRC used to work a sanction and reward system of tax amnesties and taskforces in their advertising campaigns. This has recently changed to the guilt trip of ‘How could you cheat us when we are all feeling the pinch of recession?’. This is combined with the fear inducing language of paying the correct tax “before it’s too late” and the public humiliation of appearing on their website for tax evasion. Yes, if you avoid paying more that £25,000 you and all of your personal and financial details will appear on HMRC’s website for all to see.
Again, reaching high targets is cited as the reason for this change of attitude.
8. International Tax Collecting Co-operation.
As countries around the world strive to increase their tax revenue, more agreements about sharing information are being reached. This makes an offshore bank account much less secure than it used to be, even with previously renowned tax havens such as Switzerland and Liechtenstein. Our government has seen an 18% increase in requests for information about taxpayers from other countries in the last year.
In 2006 there was an important legal ruling that made high street banks reveal the records of their clients who had offshore accounts to HMRC. The tax office also had massive gains of leaked information, mainly from HSBC Jersey.
9. Information from Third Parties.
Even more recent powers have been given to HMRC which allows them to get “bulk” information from other government agencies and businesses.
This means that the tax office can zoom in on particular professions and use this information to trawl for tax evaders. For example it turned its attention to the medical profession in 2008. It was looking for professionals who were not declaring fees for consultations, examinations and other services. The new powers meant that it could get information from medical insurance companies, NHS trusts and private hospitals.
When plumbers and heating engineers were under the spotlight, HMRC used information from the Gas Safe register to secure five arrests.
All of our information is now interconnected and HMRC has access to it all. For example, being able to use the Land Registry and DVLA data means that HMRC can compare the price of their expensive car with their relatively small flat and alarm bells ring. It also means they can see what property you own and check if you have declared rental income on your tax return.
10. The ‘Affluence Unit’.
This section of HMRC is staffed by 200 people who have been set the target of raising £560 million in four years. They are to do this by checking that those who are worth less than 20 million but pay the 50% tax rate are following the tax law.
They focus their attentions on people who own property abroad, offshore accounts and commodity traders. They use all of the technology at their disposal to find people who are overseas property owners, use risk assessment to find those who seem unable to afford this property legally and those who have not declared the income and gains from the property.
Just goes to show, from using old-fashioned whistle blowing to the most modern technology, the taxman really is watching everyone everywhere!
