How HMRC keeps a watchful eye
Mark Lee's recent article on clients querying tax schemes is very timely, as HMRC continues to turn the screw on offshore evasion in collaboration with US and Australian tax administrations.
The tax authorities are currently sifting through a mountain of data on offshore tax evasion data. But we should not be surprised at the increase in activity against these tax schemes, as the Revenue had pre-warned us about the strategy in in its December 2012 paper, Lifting the Lid on Tax Avoidance Schemes.
It described proposals for improving the information available to taxpayers about such schemes and the risks of using them. However, what it really meant was that it would zero in on promoters and do all it could to ensure such schemes were disbanded.
But for many AccountingWEB members and high street practitioners, most of our clients would not even know what a tax scheme is if one leaped out and hit them.
But all of us may have clients who could be the subjected to the attentions of other anti-avoidance teams. The HMRC affluent was unit originally set up in 2011 to deal with the personal tax affairs of the UK’s richest people, at the time specifically those with assets of between £2.5m and £20m.
Around 100 more staff were recruited a year later and the unit's remit was expanded to deal with the 500,000 wealthiest people in the country with a net worth of £1m instead of the original £2.5m. Half a million seems to be a surprisingly small pool; look at any estate agents website and you will find many houses valued in excess of £1m. It is not a lot these days.
One of the key characteristics that will be targeted by the affluent compliance team is "wealthy people who fail to file their self assessment return on time".
Behind all of this enforcement and compliance activity, is HMRC’s Connect computer system. The analytical program is becoming more accurate and more successful and won the best big data project award at the UK IT Industry Awards last November. The system was brought into use in 2009 and was designed by defence contractor BAE Systems.
Despite costing HMRC £45m, Connect delivered £1.4bn of additional revenue by 2011. It uses a mathematical technique to search previously unrelated information and detect otherwise invisible ‘relationship’ networks. Using Connect, HMRC sifts through information on property transactions at the Land Registry, company ownerships, loans, bank accounts, employment history, voting and local authority rates registers and compares with self-assessment records to spot taxpayers who might be under-declaring or not declaring income.
Last year Connect made links between tax records and third party data from hospitals, pharmaceutical companies, insurers and even gas SAFE registrations. DVLA records and the shipping and Civil Aviation Authority registers help identify owners of cars and planes who declare income that the computer suggests cannot support such purchases.
In a recent webinar, Derek Allan, tax director at ICAS, described highlighted the Revenue’s use of robot tools to focus on online traders using sites such as eBay, Gumtree and AutoTrader. The Connect system can estimate whether the trading turnover equates to being a hobby or an actual trade, and compares the data with with tax returns.
Allan also explained how HMRC inspectors have been using the ‘chi squared’ test (or Benford’s Law) for more than a decade. Allan first came across the technique in 2003 when an inspector used it to claim that a restaurant’s sales were fabricated. The test uses randomness of figures specifically that in many real-life sources of data the number ‘one’ occurs as the first digit approximately 30% of the time, larger numbers less frequently. Unaware of this finding, fraudsters are more likely to choose numbers that do not fit this pattern.
The Connect computer system is becoming so sophisticated that should a client receive an enquiry letter following HMRC’s use of the system then you can just about be sure that he is guilty of some non-disclosure. The 2012 HMRC paper Closing in on Tax Evasion describes the method, use and future use of the Connect system and is a must-read for any accountant.
So far the anti-evasion departments have concentrated on the easiest targets.
Several individuals were caught out after appearing on the Channel 4 television programme 'My Big Fat Gypsy Wedding' having spent thousands of pounds on lavish family weddings. HMRC queried how could they afford it and of course they could not.
As a result of its analysis work HMRC's also recently announced that it had identified more than 200 UK accountants, lawyers and other professional advisers who advise on tax avoidance structures. These individuals will come under instense scrutiny.
Exactly how are those accountants are going to be dealt with has yet to be emerge. Will it be just the accountants, or will other clients of those accountants who are not part of the tax scheme also be scrutinised?
Whatever happens, HMRC’s current ‘dash for cash’ is likely to bring unwelcome attention to a much broader groups of taxpayers and advisers. We have been warned.