Taxman’s new system targets more hidden income

HM Revenue and Customs (HMRC) is utilising a program called ‘Connect’ to look at all aspects of individuals lives and see where there may be some income or assets which have been missed in declarations and, if they find discrepancies, they then intend to issue demand notices for unpaid tax.

BDO’s warning comes at the same time that the Revenue has set up a taskforce to target wealthy tax cheats in Scotland and is part of an ongoing programme to generate income from individuals and businesses which avoid tax.

HMRC’s software is intended to look at databases to identify discrepancies between income, assets and transactions. This could include undeclared income or sold assets, business transactions which were transferred into a personal account and numerous other means which individuals utilise to hide money from the taxman. For HMRC the advantage of this software is that it processes tens of thousands of transactions in seconds whereas before it would have take months or even years and they are also using it to examine historic transactions going back years.

In a recent BDO report on HMRC’s “digital evolution” the firm found more than a billion items of data from 30 sources already fall within the scope of Connect and these include public sector records – such as the Land Registry or DVLA – as well as a growing number of private businesses or trade associations. The reach of the software will be extended next year from September 2016 when HMRC starts having access to files held by banks and other financial firms based in British overseas territories, such as the Channel Islands; and from 2017 Connect will have access to data in a further 60 countries.

Martin Bell, Tax partner with BDO, explained: “We are seeing various drives by HMRC to undertake more intelligent and effective interrogation and use of personal data. Their thinking is that data on individuals from a diverse array of sources may show up discrepancies in individuals’ financial statements which are being interpreted negatively by the Revenue. The result is that many individuals may receive inflated demands for unpaid tax going back many years with little understanding of how or why this demand may have arisen.”

“Whether it is through accident or intent we are starting to see large demands for tax on transactions where taxpayers were unaware there would be a liability. Individuals must not ignore such demands and instead should consider carefully whatever has given rise to the new tax demand from HMRC.”

“Failure to act will result in further action as HMRC is tasked with substantially increasing its tax take in a relatively short period of time. HMRC’s track record of implementing IT solutions is not a positive one and errors will definitely arise. This unfortunately means that taxpayers will need to waste time and money responding to these and correcting HMRC.”

This search for undeclared income includes those who use websites such as eBay, Etsy and Gumtree to sell goods. All of these websites have now been forced to disclose account details to HMRC as part of their crackdown on tax evasion. This can include seller’s names, email addresses and details of what they have sold. The result has been that 14,000 letters have been issued to vendors in the last three years.

Mr Bell added: “The issue at the heart of online trades is whether the individual is conducting a hobby or a business. Some of this could be explained simply by volume size. If an individual completes, say, ten trades a year then HMRC would be hard pressed to call them a “trader”. However, if someone has completed say 300+ transactions in the last year and is regularly offering up a selection of goods which could not easily be perceived as personal then there may be some explaining to do.”

“HMRC is using Connect to attempt to find undeclared tax but also to go further, and shed light on other activities or assets which are not being properly taxed. A further example is where Connect detects income from overseas. HMRC will want not only that income to be properly taxed, but also information about its source. Is there, for example, a business or property generating that income and if so are other taxes due relating to it or other activities? This software can also identify whether individuals have exceeded their annual ISA allowance or whether they are claiming too much tax relief on pension contributions.”

“It will also target buy to let landlords who may not have declared their property as a business but registered it in their own name without declaring the income from the tenants or any gains from a sale. Connect allows for a cross referencing of ownership with purchase and sale price which results in a possible capital gains tax liability. HMRC is likely to soon be able to demand client lists and rents paid by estate agencies so the net will spread to larger landlords in the near future.

“The message is clear that any individual who receives an unexpected letter or tax assessment from HMRC must act to address the issue and reply. If an individual is concerned that they may have reasons to be investigated by HMRC then they should consider whether to contact HMRC now and make a voluntary disclosure, otherwise the consequences and cost of HMRC making a discovery could be much more severe.”