HMRC’s impressive new software trawls billions of items of data from dozens of sources in its hunt for underpaid tax – and it’s about to have access to even more information, which can be shared with 60 other countries.
The offices of the taxman are not usually credited with efficiency and success. But there is one aspect of HM Revenue & Customs which is highly – some would say terrifyingly – efficient, and that is its powerful computer program which is accessing and trawling databases of personal financial information on an unprecedented scale.
The software, called “Connect”, has been developed at a cost of £80m over seven years. Its basic job is to scour vast databanks of personal and commercial information, seeking to unearth links between individual taxpayers and businesses, income, assets and transactions.
It then matches its findings against the information the taxpayer has provided through their return. Discrepancies are flagged and could prompt a tax investigation.
The searches take mere seconds and are undertaken repeatedly to capture new information.
The reach of the “Connect” project, and the speed with which the databanks can be interrogated, are both increasing. More than a billion items of data from 30 sources already fall within its scope, according to the accountancy group BDO, which has just published a report on HMRC’s “digital evolution”.
These sources include public sector records – such as the Land Registry or DVLA, see below – as well as a growing number of private businesses or trade associations.
From next year Connect’s powers will extend further still. September 2016 is 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 goes truly global with access to data in a further 60 countries.
A success? Yes, in that the numbers of investigations initiated by Connect are growing, and in that £3bn extra tax has been clawed in as a result of Connect since its launch in 2008.
But many have their doubts. Not only is there a possibility that some of the data could be erroneous or incomplete – triggering spurious tax investigations or worse, possible prosecutions – but there are also fears about security.
And then, of course, the niggling anxiety about so much of our personal information residing in the hands of the state.
What can HMRC find out about you?[divider]Your Income[/divider] One of Connect’s biggest jobs is to hunt for income disparities. It will process information about your bank account balances and income, and match this with other information – mainly your tax return and, for example, and your PAYE data submitted by your employer.
If the information doesn’t tally, start preparing your answers.
Richard Morley, BDO partner and expert on Connect, said: “HMRC is using Connect to find undeclared tax but also to go further, and shed light on other activities or assets which are not being properly taxed.”
An example he gives is where Connect detects income from overseas. “The taxman will want not only that income to be properly taxed, but information about its source. Is there a business or property generating that income and if so are other taxes due?”[divider]Your Finances[/divider] Banks and other financial firms report to HMRC the interest paid to individuals across scores of millions of accounts, and this data is fed into Connect. The main object is to spot undeclared, taxable savings income.
But Connect can go further, identifying, for example, whether investors have exceeded their annual Isa allowance.
If you are claiming tax relief on pension contributions, and entering this on your tax return, Connect will be wanting to see a parallel increase in the balance held by your pension provider.[divider]Your Property[/divider] HMRC has for years had access to Land Registry databases, but it can now conduct searches faster than ever before.
The Land Registry typically holds details of the price you paid for a property and your mortgage lender, if there is one.
By cross-referencing stamp duty records with the Land Registry’s files Connect can identify where capital gains tax is thought to be owing, for example.
Multiple property ownership where the taxpayer isn’t also declaring rental income could be another trigger for investigation.
HMRC has not yet – according to a number of accountants representing large landlords – made blanket demands of estate agencies to provide lists of clients and the rents paid to them.
But this would be within its powers under “Schedule 36”, wide-ranging legislation which gives the taxman power to force third parties to disclose data where it believes there is a lot of “under-reporting” of tax.[divider]Your Lifestyle[/divider] HMRC uses data-collecting programs or “robots” to patrol popular online marketplaces such as eBay or Gumtree to see whether your level of activity is suspiciously high.
“To manually compare the data would take years, but Connect can do it virtually instantly,” Mr Morley said.[divider]Your Business[/divider] For genuine small businesses Connect has other weapons at its disposal, such as an ability to plough through a staggering four years of credit card transactions.
Again, without hefty computing power such exercises would have been impossible. Now Connect can crank into action to check that your stated sales fit with this electronic record of card takings.[divider]Your Car[/divider] Connect, and the 150 HMRC analysts who pore over the results it generates, deploy something called “lifestyle profiling” in their efforts to unearth anomalies – and unpaid tax.
If you drive an expensive vehicle – according to records held by the DVLA – Connect will want to see income to match.
Again, as Mr Morley points out, one question leads to another. “You might be able to satisfy HMRC that the vehicle was bought with a cash gift,” he said, “but you can then expect to it ask who gave you the gift, and if it was an inheritance whether the appropriate tax was paid.”[divider]Social Networks[/divider] Entries on Facebook and Twitter are not routinely trawled by Connect, experts say, but if you become the subject of an investigation you can expect these to be examined for evidence of spending, travel, or ownership of property and other assets.
Could it all go wrong?
Apart from information gathered by HMRC being incorrect or incomplete, there is also the problem of sending and storing the data securely.
This is likely to become far more of an issue in the next two years as other countries’ tax systems integrate their own versions of Connect with ours, to facilitate what one commentator has dubbed “a global swapshop of everyone’s personal financial data.”
From 2016 financial institutions in British Overseas Territorities will share data with HMRC. From 2017, this extends to 60 other OECD countries and by 2020 virtually all countries will have some form of data-sharing agreement in place.
In theory the data should always flow to the country where the individual is resident for tax purposes. So HMRC would share data with another country only if the individual was due to pay tax there. In turn, HMRC would want bank account data from say, South Africa, where it related to taxpaying residents here.
“We will see data being sent to all signatory countries,” Mr Morley said. “It certainly raises issues around privacy and security. There would be obvious opportunities for hackers, and authorities will have to introduce extremely secure safeguards.”
George Bull, a partner at rival accountant Baker Tilly, made a more philosophical comment. “We are seeing the shift of responsibility from the tax collector to the tax payer,” he said. “In the past the taxman would tell you what you owe. Today it’s up to you to declare what you should be paying. And HMRC has the means to check that what you’re saying is complete and correct.”