HMRC makes record payments to informants

HMRC is paying out record sums to informants reporting on people they suspect of underpaying tax, as it strives to meet government targets for raising the amount of tax it takes.

Payments to HMRC informants totalled £605,000 over the last year (to March 31 2015), up from £402,000 the year before, and £395,000 in 2012/13. Around 100,000 calls were made to HMRC’s confidential telephone hotline over the last year.

The increased likelihood of a substantial financial reward means more members of the public will be tempted to come forward to the Revenue with their concerns about others’ underpayment of tax. Whilst some reports will be credible, a large proportion are likely to be unfounded, and an increasing number of innocent taxpayers are likely to face investigation as a result.

Recent tax avoidance scandals mean that the Revenue is under increased pressure to follow-up leads and demonstrate that it has acted on all of the information it is provided with, however seemingly low in quality.

The increase in the amount of money paid out also reflects the fact that HMRC is clamping down on a wider range of taxpayers. It broadened its focus from High Net Worths and those involved in traditional cash-in-hand businesses some time ago; it is now likely to be handing out rewards for information on taxpayers from all walks of life.

Finding sufficient supporting information to justify following up informants’ reports will have been made easier by HMRC’s recent investment in technology. Its new multi-million pound database system, Connect, gathers real time data from multiple public and private sources to help identify where underpayment of tax may be an issue. Information is drawn from banks, local councils, legal aid data and even social media.

Rather than having to scrutinise each tax return individually, the Connect database helps HMRC to zoom in on ‘outliers’ within a particular group. These are individuals or businesses reporting lower profits or incomes than their peers, or whose expenses seem unusually high.

With more members of the public coming forward with information, and HMRC equipped and under pressure to clamp down on any underpayment of tax, many face an increased likelihood of investigation.

The increased risk these developments pose for ordinary taxpayers means that many are opting to protect themselves against the costs that may be incurred in a tax investigation.