Recent research shows that the average length of tax enquiries undertaken by HMRC’s local compliance teams into ordinary taxpayers has increased over the last year, from 2.5 months in 2012/13 to 3 months in 2013/14.
Even basic tax enquiries can be very disruptive, stressful and costly to both individuals and businesses. Those enquiries can lead to a full blown investigation, where HMRC looks in forensic detail through all of an individual’s records or a company’s books.
Regardless of the whether the enquiry finds anything incriminating, the individual or business must always pick up its own bill for dealing with an HMRC investigation, which depending on its length could be a large sum. It is also very challenging for small businesses trying to deal with the disruption caused by investigations.
The rise in the average length of a tax enquiry also means that the cost of advisory fees for lawyers, to help individuals and small businesses deal with the enquiry, is likely to have increased.
Innocent individuals can easily be drawn into tax investigations because HMRC draws information from multiple public and private sources onto its database system, called ‘Connect’, which can throw up incorrect leads.
As well as helping HMRC to identify broad groups where underpayment of tax may be more common in order to examine them more closely, the Revenue also uses it to identify individual suspects. To do this, it draws data from a range of sources, including: banks, local councils, the Driver & Vehicles Licensing Agency, insurers, hospitals, online sales and purchases records, and even social media.
The use of data from banks allows HMRC to keep track of an individual’s savings and spending, or a business’s sales and investments. If these don’t align with the income or profits stated on their tax-returns, it raises a red flag to the Revenue.
HMRC can now use an individual’s social media profile to build up a more thorough outlook of their lifestyle. For example, once an enquiry has been opened by HMRC, social media boasts about expensive cars or even holiday pictures could prompt an enquiry if they do not fit with the individual’s reported income.
Data on E-commerce transactions is also used by HMRC. It uses the information to identify high volume traders making substantial undeclared revenue through auction and community selling websites like eBay and Amazon Marketplace.