Avoiding an investigation: What do HMRC look for?  

HRMC are leveraging advances in digital technology and data analysis tools to enable more efficiently targeted enquiries. For example, in 2021 although HMRC undertook fewer stamp duty land tax investigations, the same amount of unpaid tax was achieved by targeting higher-value sales.

An enquiry into an individual or trustee’s affairs commonly focused on entries made on a specific tax return. Such an enquiry must be opened within 12 months of the return’s submission, unless submitted late. In these cases, HMRC will request information and documents to check any aspect of the return, comparing it with information already held to ensure the return is complete.

In some cases, HMRC’s Fraud Investigations Service may open a Code of Practice (COP) 8 or 9 (COP9) investigations. COP9 is used for suspected fraud or deliberate error cases, whereas COP8 tends to be used for cases where there is a tax technical issue (e.g., whether a source of income is taxable in the UK or not).

So, what information will HMRC look at?

• Land Registry
• Local government planning consents
• UK Border Agency
• DVLA
• Companies House
• Council Tax
• Business Rates
• PAYE/Corporation Tax/VAT/CIS returns
• Import and export records

In addition, there may be other sources such as private sector financial information from credit card issuers and companies such as eBay, PayPal and Airbnb and information exchange with tax authorities from other jurisdictions. Tax investigations may also be triggered because of a tip-off from a member of the public.

All credit and debit card payments made to UK businesses via the companies that process card payment transactions can be accessed to ascertain the value of transactions completed by a specific trader, the information is then used to compare card sales made by a business each month with the taxes paid. Any inconsistencies may be queried. The system also indicates where more in-depth investigations might be required, identifying “hidden” relationships between people, organisations and data that could not previously be identified.

How does HMRC use the information?

The department dealing with the collation of data is the ‘Risk and Intelligence Service’ and uses a sophisticated data matching and risking tool called Connect. The system is designed to process and analyse large volumes of data and incorporates many analytical tools and methods including predicting trends and individual behavior patterns. By using Connect, HMRC can automatically:
Obtain third party information from sixteen business categories including employers, banks, insurance companies, financial institutions, brokers, auctioneers, estate agents and charities.
Review employment records, which can also assist in profiling a business as well as identifying those operating by using persons who may be termed as ‘self-employed’ but may really be employed.

• Connect taxpayers to companies/entities
• Connect bank accounts
• Collate social media information
• Compare taxpayer/business profiles to identify those that are similar

Therefore, in over 90% of cases, tax investigations are triggered by information and analysis generated by Connect.

Patterns in your behaviour

Connect can also track patterns in a taxpayer’s behaviour. By matching the data with information already held (or declared on the tax return with such third-party items). HMRC can use the data pattern to seek anomalies between bank interest, property income and other lifestyle indicators. It risk assesses business sectors in local and geographical areas, comparing similar businesses within the sector.

Does Connect start tax investigations?

After all the analysis, cases for enquiry being identified as a compliance risk and sent to the appropriate local office for possible enquiry, where an HMRC investigator will make the final decision on whether to pursue an enquiry or not.

Post pandemic, HMRC has restarted tax investigations that had been paused and in the first quarter of 2021, over 100,000 compliance investigations were opened, a 36% increase from 75,000 compliance investigations in the last quarter of 2020. The number will only increase the more sophisticated the ‘Connect’ programme becomes.

How we can help

If you have received an enquiry letter from HMRC, for many taxpayers, this can be a very daunting experience. Our team of tax investigation experts are on hand to guide you through an HMRC tax investigation.

Please get in touch if you need any help with tax investigations.