10 ways HMRC can tell if you are cheating the tax system

In today’s modern digital age, it is increasingly hard to avoid the many methods HMRC uses for catching tax cheats and those looking to bend the rules. HMRC has come a long way in recent years, and it now combines both modern technology and traditional methods, which cover quite a lot of suspicious ground. Have you recently posted on Facebook an image of your new flash car? Do you have a disgruntled ex. partner who knows about your undeclared income? HMRC now operates a tip-line for anyone who would like to report about suspected tax evasion.

As always, we recommend that you declare all income, and assets in accordance with HMRC guidelines and UK tax-law and legislation, or simply speak with your accountant if you’re in any doubt.

Here are the 10 most familiar tactics HMRC uses today.

Espio-Tax  - 10 ways HMRC can tell if you are cheating the tax system

Connect

HMRC operates a powerful weapon against tax evasion called Connect, a program that automatically analyses data from multiple sources that they do not reveal. Connect is a computer system that includes social network analysis capabilities and data mining. It was developed by HMRC to cross-references business’s and people’s tax records with other databases and to establish fraudulent or undisclosed (misdirected) activity. HMRC Connect also interfaces with financial information from British Overseas Territories (which have been known tax havens) and with around sixty other OECD (Organisation for Economic Co-operation and Development) countries.

Informants

Long suspected as one of HMRC’s best sources of data gathering and going strong after many years, the HMRC tip-line and online reporting allow the general public to report whoever they want, anonymously or for a “tip” with payouts in the tax year 2017-18 reaching £343,500. Reasons for reporting evasion generally include disgruntled ex-employees, estranged partners and jealous rivals.

Social Media

Social Media sites such as Facebook, LinkedIn and Twitter are the modern day hunting ground of the HMRC inspector. Prior to investigations they can be reviewed or can be the cause of an investigation from advertising services that are not declared on tax return to showing of house renovations and large purchases.

Fear and guilty conscience

Over the last few years, HMRC has introduced a number of stricter measures such as tougher penalties and surcharge regimes, alongside increase penalty targets for investigators. They regularly print a full list of deliberate tax defaulters which includes the individual’s name, addresses, business name and amounts of the default and charges, naming and shaming those who evade more the £25,000 in tax.

Making Tax Digital

Launched this year and aimed at digitizing and future proofing reporting of all taxes over the next decade, Making Tax Digital means taxpayers are required to make quarterly or annual submissions of income, expenses and tax. HMRC are hopeful that this will encourage compliance and accuracy but primarily provide them with more data to review and analyze.

Suspicious activity

Money laundering regulations mean that professional bodies and members of professional bodies such as solicitors, data handlers, bank workers, mortgage advisors and accountants have to report suspicious activity. Thousands of ‘Sars’ (Suspicious activity reports) are filed each year and fed directly into the ‘HMRC Connect’ database, ready for inspectors to analyse.

Forced disclosures

It has become common practice for HMRC to write to tax advisors, accountants, bankers and solicitors requesting details of clients that utilize offshore trusts and ‘extreme tax-planning’ measures. They may also speak with businesses that employ the same or similar type employees and look into their contractual structure in order to collect additional or missing taxes.

Leaks

Leaks such as the Panama papers and the Diachenko database leak have featured in headlines around the world and presented HMRC with unprecedented details of offshore activity and undeclared income for thousands of UK taxpayers. In addition, these paved the way for reforms into the tax and reporting systems.

Global Co-operation

After multiple news stories regarding offshore tax-havens, HMRC has upped their game over the past few years with a global crackdown on tax evasion. The “common reporting standards” mean that offshore centres are required to provide details such as bank balances, interest, dividends and certain types of income to clients home governments. This, along with the Connect system allows them to request further details from the taxpayer, if they have not been reported on a return.

The hidden economy

Ongoing efforts to collect billions of pounds of lost tax due to a hidden economy have led HMRC to focus on two specific groups of people; ‘Ghosts’ – people whose entire income is unknown to HMRC. ‘Moonlighters’ – people who declare part of their income, but have sources of income that HMRC is not aware of. Also referred to as “cash-in-hand”, “Saturday jobs” or “side jobs”. Ongoing improvements in registrations of second properties and other systems such as HMRC Connect, mean that it is easier to see where the numbers don’t add up and are actively targeting people they see as living outside of their means.

Prepared by David Crossley and Ron Maoz

Posted by David Crossley