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Narrowing the Tax Gap to Pay for COVID-19 Support

28/10/2020

In our previous blog post we addressed what the Tax Gap is, and the different methods HMRC are using to narrow the gap. In this article, we look at the different methods HMRC uses to combat tax evasion.

How do HMRC combat tax evasion?

As you would expect, with the staff count at HMRC in decline, the use of computer software programmes has been the ‘go-to’ by HMRC and it is proving successful.

It is reported that the main data analysis programme used by HMRC has a number of analytical tools (Connect) with predictive analytics and dynamic benchmarking. Such data analytics are also relying on address matching techniques.

The computer system Connect was acquired by HMRC back in 2010 for a cost of £100m and it has reportedly supported the collection of previously undisclosed tax of £3bn. Apart from these numbers, HMRC is very secretive as to Connect but did report to the House of Commons Committee that Connect is ‘a data matching and risk tool that allows HMRC to cross-match one billion HMRC and third party data items. It identifies ‘hidden’ relationships between people, organisations and data that could not previously be identified.’

HMRC concluded by saying that ‘Connect is a very powerful data tool central to HMRC’s work to close the tax gap and tackle evasion which is also being exploited to counter fraud and error in tax credits.’

The source data for Connect includes the HMRC own data such as Tax Returns but primarily the data comes from third parties. These third parties include banks, credit reference agencies, credit/debit card accounts, PayPal, foreign tax jurisdictions, property websites, Amazon, Google Street, council tax records, DVL records, electoral roll, insurance companies, flight sales & passenger info, social media etc.

Perhaps some will see the above as ‘Big Brother’ stuff and quite scary but if you declare your income/gains and pay your taxes, what is there to be scared of?

What are HMRC’s powers, and what does the future hold?

It’s no surprise that more use of Connect as supported by artificial intelligence is considered by HMRC as the way forward.

Professional advisers need to ensure that they in turn up ‘their game’ to protect their clients from intrusion into not only their business but also their private lives. Connect while considered to be HMRC’s main weapon against tax evaders, can also prove to be an unreliable source of information particularly when it collects ‘fake news’ say on social media, or perhaps incorrect data relating to an individual or business is posted maliciously on social media to indicate undisclosed assets income.

There is certainly concern that HMRC may misuse the data provided by Connect with also data privacy concerns. However, HMRC has made it clear that using Connect supported by artificial intelligence is the way forward in their fight against tax evasion.

In addition, HMRC has announced that their evaluation of their powers and safeguards put on hold when COVID-19 pandemic hit the UK is only a postponement rather than a cancellation.

HMRC intends to revise the HMRC Charter, have new proposals for tackling tax avoidance schemes (gone are the days when ‘tax avoidance’ was considered legal!), raising standards in the tax advice market and amend HMRC’s civil information powers.

So watch this space as, in short, the above HMRC evaluation will only mean more powers to HMRC so that they can increase their activities in the continuing narrowing of the UK tax gap so that costs such as the NHS and the continuing Covid-19 Government support grants can be paid for from general taxation-nothing wrong with that!

Given the HMRC investigatory powers, if you are a small-medium enterprise (SME) trading in the UK, what should you do?

We always advise, and where required, provide bookkeeping and accounts (periodical management accounts and annual statutory accounts) support to our SMEs clients so that they maintain up to date and good detailed financial records not only to support the running of an efficient business but also to support the SME’s tax compliance requirements, including where appropriate VAT, with HMRC.

We also make full use of the additional information section (commonly known as the ‘white space’) on the SME annual Tax Return as filed to HMRC.

If there are undisclosed income/gains then the SME taxpayer should consider approaching HMRC under the voluntary disclosure procedures including the plea bargain agreement as detailed in our previous article.

If you have a formal enquiry from HMRC then perhaps review the data that HMRC may have obtained from their Connect data software system. This may show you what prompted the HMRC and if that data source can be shown to HMRC to be unreliable.

All good tax advisers like HaesCooper have a professional fees insurance product available for an SME client to buy which will cover the tax adviser’s cost of having to deal with a future formal HMRC Enquiry raised on the SME. Dealing with a straightforward HMRC Enquiry with no additional tax being payable at its conclusion can be time-consuming and therefore costly

in professional fees to the SME client. So signing up to the professional fees insurance is highly recommended to all SME clients.

How We Can Help

At HaesCooper we can help SMEs deal with their accounting and taxation compliance requirements at competitive fee rates – ranging from bookkeeping or preparation of accounts and tax returns through to providing a Virtual Finance Director (FD) service providing the benefits to SMEs of an in-house FD at a fraction of the cost. The cost of our FD service will be at an agreed fixed fee. Let HMRC bother some other SME rather than you! Contact us to learn more.