HMRC’s Latest Weapon and the Risk to Your Clients

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. HMRC’s powerful computer program called ‘Connect’ is accessing and trawling databases of personal financial information on an unprecedented scale in its hunt for underpaid tax. The software has been developed at a cost of £80m over seven years and 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 on your clients. The numbers of investigations initiated by Connect are growing, and £3bn extra tax has been clawed in as a result of Connect since its launch in 2008.  

What does the taxman know about your clients, their finances and their lifestyle? Income and pensions ... One of Connect’s biggest jobs is to hunt for income disparities. It will process information about your client's bank account balances and income, and match this with other information – mainly tax returns and, for example, the PAYE data submitted by employers.

Property ... 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 paid for a property and 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.

Their businesses ... 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 the stated sales fit with this electronic record of card takings.  

Client bank accounts, savings and investments ... 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.

*The increasing risk of investigation HMRC is currently focusing on increasing tax collection by carrying out a greater number of compliance checks. Official figures show that HMRC collected huge additional revenue of £20.7bn as a result of last year’s crackdown on tax evasion and avoidance and small and medium-sized businesses accounted for the largest proportion failing to pay – resulting in a massive £16.7bn of tax avoidance. Anyone can be selected for investigation – whether a business owner, director or an individual taxpayer and from next year Connect’s powers will extend further when HMRC starts having access to files held by banks and other financial firms based in British overseas territories, such as the Channel Islands. It is right to believe that HMRC investigations are happening more and more frequently.  While HMRC publicises the high profile cases involving millions in unpaid taxes they are very few statistics which point to the number people who are investigated who are without fault.  No one is immune from an investigation – individuals and businesses can be chosen at random with HMRC having no suspicion that anything is wrong.  HMRC carry out random investigations to act as a deterrent to those who may think of evading or avoiding tax, with no thought of the cost to the taxpayer. CCH Fee Protection has seen the results of HMRC activity in the last few years with high level of claims activity. Its tax investigation insurance – Premier Protection  - which pays for the professional costs of defending taxpayers in HMRC investigations – responded to the new compliance regime by widening their cover protecting taxpayers whatever tactics HMRC employs. Consequently, despite the already significant level of compliance activity being felt by taxpayers, we should all brace ourselves for it to increase further as I can see no signs of the risk-reducing.*

Extracts were taken from 'What does the taxman know about you, your finances and your lifestyle? The Telegraph 25th June 2015  © Telegraph Media Group Limited.


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