How does HMRC know about undeclared income?

Sometimes, income goes undeclared by accident, in instances where the taxpayer doesn’t realise they need to report the income. Sometimes taxpayers are unsure how to declare it.

Other times, taxpayers deliberately try to evade paying tax.

Regardless of the reasons for failing to declare income, HMRC has extensive means to uncover undeclared and under reported income. Their methods have become increasingly sophisticated in recent years, leaving no stone unturned in their search.

In this article, we’ll discuss the methods that HMRC uses to uncover undeclared income.

 

Connect

In 2010, HMRC launched a new sophisticated, specialist software called Connect. It detects patterns, connections, and inconsistencies across an enormous range of data sources.

The data sources that Connect feeds off of include:

• Information from other Government agencies/departments (DVLA, DWP, Companies House, Land Registry, electoral roll, council tax records, etc).
• Tax returns (income tax, VAT, corporation tax, PAYE).
• Financial records (bank account statements, debit/credit card accounts, credit reference agencies, insurance companies, crypto asset platforms).
• Online sales records (eBay, Amazon, Zoopla, Rightmove, etc).
• Social media.
• Peripheral information like Google Earth, sales for flights, etc.

Connect is an impressive resource that has uncovered inconsistencies between declared income and lifestyle habits far more easily than human analysts could.

 

Campaigns

HMRC runs highly targeted “campaigns” which take a deep dive to investigate undeclared income in specific sectors. For example, they’ve targeted plumbers, electricians, and e marketplaces in recent years.

Another goal of these campaigns is to inform these taxpayers how to get their tax right so they don’t unknowingly fail to declare income. They encourage people to voluntarily disclose discrepancies in their tax paying. In fact, most of the money they recuperate is from taxpayers owning up to their mistakes.

Under these campaigns, the penalties are much lower than if you are caught out by HMRC themselves. It can be around 20% of the extra tax owed if you voluntarily disclose your errors, versus up to 100% if HMRC catches you out independently.

 

Fraud Hotline

If someone suspects you or your business of tax evasion/fraud, they can tip off HMRC on their Fraud hotline. The hotline can receive over 100,000 reports a year.

HMRC compensates informants for the information they provide (in cases where the reports did result in significant findings), meaning it has become a fruitful source for uncovering undeclared income.

 

 

Suspicious Activity Reports

It’s estimated that 1 in 4 HMRC investigations are triggered by a suspicious activity report (SAR). A suspicious activity report is a document that financial institutions like banks must submit where they suspect someone is participating in money laundering or terrorist financing.

Some actions that are flagged as suspicious activity include:

• Unusual transaction patterns like large bank deposits, frequent transfers to/from foreign accounts.
• Using intermediaries to carry out the transactions without a clear rationale for doing so.
• Frequently opening and closing accounts with no clear reason for doing so.
• Being unwilling to share personal identification.

 

Common Reporting Standard

The Common Reporting Standard (CRS) is an international framework developed to tackle tax fraud between countries. Under CRS, financial account information is automatically exchanged between participating countries.

This means that banks, insurance companies, investment firms, and other related financial institutions must collect account information (e.g. balances, dividends, interest) of foreign taxpayers to send to local tax authorities, who then send it to the tax authority in the foreign taxpayer’s country of residence.

This combats offshore tax avoidance head on.

 

Social Media

Social media is a bountiful source of evidence for a disparity between lifestyle and declared income.

Several years ago, the popular Channel 4 television programme “My Big Fat Gypsy Wedding” raised eyebrows when it came to the cost of the lavish weddings they put on – there seemed to be a clear gap between their wealth and their declared income. HMRC investigators found tax evasion measures were at play for some individuals featured on the show.

Even Google Earth offers insight into wealth vs declared income. Your house, your car, and your decor can all build a picture of your expenditure, which HMRC can compare to your declared income records.

 

 

Data Leaks

Data leaks from big organisations gives HMRC a fresh source of information to investigate.

For example, the Panama Papers leak in 2016 leaked 11.5 million files outlining the offshore tax evasion efforts of very wealthy individuals.

HMRC then launched a mass investigation, resulting in prosecutions, recovered tax, and the closing of many tax loopholes.

 

Voluntary Disclosure

HMRC learns about undeclared income when individuals and businesses come forward themselves to own up to their tax avoidance efforts.

When you voluntarily disclose that you have failed to declare all of your income, the penalties are far more lenient than they would be if HMRC uncovered it themselves. Often you’ll only repay the tax due.

 

What are the penalties for not declaring income?

For most accused of or who come forward for not declaring income, the penalties are not as harsh. You usually have to repay the amount of tax due plus interest.

If you have gone a step further and created fraudulent documents or used offshore methods, HMRC will scrutinise your case more carefully and impose harsher penalties – perhaps even resulting in prosecution.

The same goes for cases where the amount of tax evaded amounts to more than £25,000, and significantly more so for cases amounting to over £50,000. HMRC employs a “name and shame” policy where the names of people/businesses found to avoid this much tax are shared with the general public.

 

 

What to do if you have under or undeclared income?

If you have undeclared income, please speak to our tax fraud solicitors. HMRC may be unaware of your undeclared income or you may have been notified that you are currently under investigation. Regardless of your circumstances, we can help.

Many individuals will immediately consult an accountant/tax adviser but it is important to note that they are legally required to report tax evasion activity to HMRC. This means you may not have much time to prepare yourself before you need to notify HMRC yourself – the penalties may be harsher if the tax adviser makes a report before you do.

When you instruct a solicitor, they are bound by legal privilege, so anything you share with them is done in complete confidence. Solicitors can then instruct tax experts on your behalf, and they then become bound by legal privilege too. The solicitors and tax experts will guide you to act lawfully and help you negotiate lenient penalties, giving you more control.

Tax evasion matters are best handled as soon as possible for the best possible results. Please don’t hesitate – call us today.

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