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HMRC have started using super-computers to help target individuals and businesses for an in-depth investigation into their tax affairs. How safe do you feel from being investigated by HMRC and is there a way to avoid an investigation taking place?

Historically, and in the days of the former Inland Revenue, the vast majority of cases selected for investigation would be on a random basis. The exception to this was where cases had been identified where tax fraud was involved and they were being conducted either with a view to criminal prosecution or via a monetary civil settlement.

However, when the former Customs & Excise merged with the former Inland Revenue, to become HM Revenue & Customs (HMRC), it was decided that each case selected for investigation should be risk assessed by a Risk and Intelligence Service (RIS) team.

In the early days of RIS, an officer would be responsible for collating a pack of papers together, mainly from documents already submitted to HMRC, and would forward the file to the particular office that had responsibility for the individual’s tax affairs. Often, the information provided by the RIS team only scratched the surface of what was contained within the confines of HMRC, and consequently HMRC sought to develop a data mining tool to assist them with better case selection.

What did HMRC do next?

HMRC and outside consultants developed a system called “Connect”, which is instrumental to HMRC’s objective of combatting tax evasion.

HMRC have invested £45 million in the system but this investment has already generated £2.6bn of previously unidentified tax evasion yield. HMRC have confirmed that 83% of all tax investigations are now started having been identified by the Connect system.

What is Connect?

Connect provides HMRC with an opportunity to link vast quantities of data, held on an industrial scale, from 28 different sources, to vastly improve their capability of risk-profiling tax payers potentially committing tax evasion.

The ability to interrogate the system appears limitless, enabling HMRC to search on individuals, specific properties, specific telephone numbers and countless other sources, enabling them to easily see links and connections between assets and individuals.

As well as targeting individuals, HMRC can use it to identify groups of tax payers and industries; it can even be drilled down to parts of the country if they so wish, which means they can target their resources far more efficiently and far more effectively than they ever could before. An example of this is in relation to the formation of various regional Taskforce teams, in order to tackle tax evasion and avoidance in high risk sectors across the UK. HMRC has collected in excess of £130m since 2011 from 70 taskforces and expects to collect over £90m from taskforces launched in 2014/15.

HMRC recently provided access to the Connect system to 5,000 front-line tax inspectors, who have been on 2 days of intensive training on the application of Connect. In addition, HMRC currently have 150 data analytic specialists who have undertaken a 12 month academy to be able to support the 5,000 front line tax inspectors currently using Connect.

A simple example of how Connect can work is when an individual wishes to claim a tax repayment. HMRC will request a contact number from the individual making the claim and invariably a mobile number is provided. This number is then captured within the Connect system and can then be used as a search parameter to link with other cases. For instance, if the same mobile number crops up on 100 unlinked individuals also claiming a tax refund, but all linked to the same residential address, it may suggest a potential tax repayment fraud to be investigated.

Another example is in relation to sorting the mountain of information obtained by HMRC from overseas banks. The Connect system can link data obtained under various Tax Information Exchange Agreements (TIERs) i.e. the UK / Swiss Cooperation agreement and compare this to information previously reported to HMRC by the relevant taxpayers.

Why is it important for you to know about Connect?

Having seen a demonstration of the capabilities of the Connect system, it is clear that this breakthrough in technology will vastly assist HMRC in connecting the many pieces of information it holds about an individual and setting out the specific risk concerns HMRC has to maximise the collection of unpaid taxes.

How do you prevent an investigation by HMRC?

Although it isn’t possible to completely prevent an investigation by HMRC, there are certain things you can do to reduce your chances of selection. These include, among others:
•ensuring tax returns are filed and tax payments are made within the appropriate deadlines;
•avoiding “round sum” values on tax returns;
•where appropriate, include an explanation in the “white space” on the tax return to explain any unusual or specific issues arising.

What if you realise you’ve underpaid tax in prior years?

Although doing nothing is always an option, we would strongly recommend you don’t simply do nothing. There are considerable benefits to be gained from making a voluntary disclosure to HMRC, which may include immunity from prosecution for the tax offence and reduced penalties. Prior to contacting HMRC, we’d recommend you speak with a tax investigations practitioner who can propose a strategy and ensure the disclosures are managed in a controlled way.