For many years, successive Governments have charged HMRC to bring down the ‘tax gap’, the difference between tax expected to be paid, and that collected.
In 2020/21 this was £32bn, or 5.1% of the total amount expected.
Contained withing the HMRC’s armoury is its own ‘snooper computer’, called Connect, a £100m investment in technology designed to improve HMRC’s ability to identify those who are understating and underpaying their tax liability.
What does this mean?
Instead of merely using information from tax returns and financial institutions, HMRC can now examine taxpayers’ financial affairs by accessing ‘big data’, and algorithmically analysing this. Where the information held by Connect does not necessarily tally with the tax return that has been submitted by an individual, within certain tolerances the account is highlighted.
HMRC states Fraud and Error Stocktake (parliament.uk) ‘Connect is a data matching and risking 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. Connect has the capacity to highlight patterns in HMRC’s rich reserves of taxpayer and third-party data, allowing HMRC to find anomalies between such things as bank interest, property income and other lifestyle indicators. Once identified, relevant compliance action will be taken. 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.’
It has come to light that there are more than 30 different databases cross referenced by Connect for analysis, although HMRC does not disclose all its sources of information. These include online payment providers, social networks, property websites and even flight sales and passenger information.
Of course, AI doesn’t always get it right, but taxpayers can reduce their risk of a nudge letter or even an investigation by maintaining good records of business and personal transactions and their investments and financial affairs. Perhaps not surprisingly, ‘failure to declare’ is the single largest factor in the tax gap.
The House of Lords’ Economic Affairs Committee has consistently called for reviews of HMRC’s powers given concerns that it has become too aggressive, but in the meantime, given the mental anguish and time wastage that can ensue should HMRC take interest, financial advisors would do well to ensure that those providers they work with can deliver accurate and timely information for their clients to self-assess.
Author
David Denton
Technical Consultant & Chartered Financial PlannerDavid’s primary role is to collate, simplify, regularly update and share technical knowledge, in a user friendly and practical way, within the Quilter group and with the adviser community. This is to assist with maximising financial planning post-tax investment returns given the complexity and fast changing legislation impacting wealth management.