How does HMRC spot the tax evaders?

There has been a lot in the news recently about tax non-compliance and there are various shades of grey among the official guidelines. Here is some insight into how HMRC collates its data.

Earlier this year, whistle-blowers at two Swiss banks handed over client account data to the UK tax authorities. At the time it was reported that at least one of the banks was foreign-owned, with clients spanning more than 100 jurisdictions no doubt worrying news for anyone with undisclosed bank accounts living in the UK.

HMRC’s statement at the time was telling. Commenting on the rumours, Patrick O’Brien, a spokesperson for HMRC said: “We get information from a wide variety of sources which we carefully examine to make sure everyone pays the right tax. Tackling tax evasion is a top priority and the days of hiding money offshore to evade UK tax have gone.”

[Related feature: How to pay less tax legally]

So what are the "variety of sources" that HMRC often refer to?

Stolen data is evidently becoming an increasing issue. Nowadays, it’s as simple as a disgruntled employee downloading data onto a memory stick and forwarding onto the authorities.

We saw this in 2010 with HSBC, when (now ex-) employee Steve Falciani did exactly that. HMRC has since been actively pursuing criminal investigations, informing savers that they are facing a serious tax fraud investigation (Code of Practice 9 Investigation). In July, Michael Shanly, a wealthy property developer who hid money in a secret Swiss bank account, was convicted of tax evasion in the first court case involving this data.

Gaining information via inter-governmental relationships is also a key tactic of HMRC’s. Anti-money laundering and anti-terrorism legislation, among other things, has facilitated a far greater flow of information between countries across the globe, as have various bilateral agreements.

Take for example the Swiss-UK tax agreement under which Swiss banks have agreed to inform HMRC of the top 10 destinations to which money removed from Switzerland is sent. Another example relates to the USA which, following a 2009 investigation into tax evasion, brokered an agreement under which Switzerland’s parliament approved legislation allowing the transfer of the names of thousands of American clients of UBS suspected of evading tax owed to the US authorities.

[Related feature: Millions of Britons 'needlessly paying too much tax']

In addition to these examples, there has also been a notable increase in bilateral Tax Information Exchange Agreements (TIEAs) following the G20 “Global Forum on Tax Transparency” in 2009.

HMRC also relies on good, old-fashioned, investigatory skills, ranging from sophisticated data mining to more surface level observation. For example, HMRC will use internet research and government databases to identify undeclared foreign property income and gains. Most holiday rentals are advertised on the internet so this is likely to be fruitful.

Also, it's not only celebrities who boast about their luxury homes and lifestyles on Twitter; doing so is fine, but only as long as you can justify to the taxman where the money came from! In fact, the internet is proving to be increasingly useful for HMRC. As part of its focus on e-commerce earlier this year, HMRC used the internet to spot "anomalies", "lifestyle indicators" and "unexplained inconsistencies" which indicate a discrepancy between information provided in tax returns and reality.

Sophisticated data mining techniques are also being applied to publicly available information in order to identify people who own property abroad. Risk assessment tools will then be applied to highlight those who do not appear able to legitimately afford the property, as well as those who do not appear to be declaring the correct income and gains from the property.

HMRC have also developed and advertised more widely the opportunity for the general public to report tax or excise fraud. This includes online reporting options and the ability for the informer to remain anonymous. Informers have always been a valuable investigative resource for HMRC, but this is likely to grow with wider use of the internet and social media. It is common to see tax investigations on the back of acrimonious divorces, from ex-employees and following disputes with landlords and neighbours.

Lastly, HMRC’s structure is such that it can gather and collate data effectively and focus its efforts on those most likely to be infringing tax law. Take for example the Affluent Unit, one of a number of initiatives introduced by HMRC to provide better “customer service” but also to tackle tax evasion and avoidance through offshore bank accounts and assets. This was set up in September 2011, to deal with 200,000 people who have net wealth of between £2.5 million and £20 million.

Each taxpayer is assigned a Customer Relationship Manager who builds up a detailed knowledge of their tax affairs. From HMRC’s perspective this means that any problems are more likely to be identified and lead to an investigation. The Affluent Unit will also review tax returns year by year, consider any third party information and check for any discrepancies.

There is also an “Offshore Co-ordination Group” (OCU), to manage the information it regularly receives from various sources and governments across the globe (as discussed above). OCU’s chief, Greg Skyte has described the vast amount of data HMRC has to manage, stating it is "80 times more than the British library".

HMRC has placed a heavy focus recently on reducing the "tax gap" (tax lost through evasion and avoidance) by a further £7 billion per year, meaning there will be even more emphasis on finding information through all channels possible. The organisation is increasingly widening the information-gathering net and, for those who have not properly disclosed their tax affairs, the risk of getting caught is increasing by the day.

Fiona Fernie is a partner in the Tax Investigations team at BDO LLP