HMRC’s database increases risk of tax investigation

Richard Proctor

HMRC’s growing reliance on Connect database could mean an increasing number of innocent taxpayers face investigation.

Over 80% of all tax investigations undertaken by HMRC now follow potential leads generated by its £45 million database system, Connect, according to recent reports. The new reliance on automated systems to identify targets means that taxpayers could face an increased risk of investigation, simply for having their name thrown up by HMRC algorithms.

Connect, which was first launched in 2010, gathers data and information from multiple public and private sources, including banks, local councils and even social media, to help HMRC identify where tax avoidance may be an issue.

The system allows HMRC to automatically cross-reference the information reported by taxpayers on their tax returns against information on their finances and lifestyle stored elsewhere. The database is also programmed to identify ‘outliers’ within a particular group – these could be individuals or businesses reporting significantly lower profits than their peers, or whose expenses seem unusually high.

HMRC’s increased reliance on the new technology could be a cause for concern. The rigidity of the database model and its strict profiling system means that red flags may be raised on an individual or business where there is no real cause for concern. An increasing number of taxpayers could find themselves on the receiving end of a lengthy and complex tax investigation as a result.

The Connect database has been central to a number of targeted campaigns carried out by HMRC. The recent crackdown on underpaid tax by buy-to-let landlords, for instance, is likely to have been driven by data obtained and stored from the Land Registry Payment. Information from the Legal Aid Agency, meanwhile, is thought to have provided leads on those targeted in the Solicitor’s Tax Campaign.

Particularly striking is the gathering of information from social media in an attempt to build a more comprehensive overview of taxpayers’ lifestyles. Online posts about luxury holidays or expensive cars could trigger increased scrutiny if HMRC decides, based on a surface analysis, that the lifestyle does not fit with an individual’s reported income. However, there could be alternative explanations such as an individual receiving gifts from family or simply exaggerating.

Whilst some of those targeted as a result of leads generated by Connect may be guilty of tax avoidance, many are more likely to be innocent. The risk is that it will be a long and costly process for them to prove it.

Larking Gowen offers its clients a Tax Fee Protection Service, which covers costs in the event of a tax investigation.  To find out more call 0845 077 4165 or email tfps@larking-gowen.co.uk