How Does HMRC Know About Undeclared Income?
In 2010, HM Revenue and Customs (HMRC) launched a super computer (or ‘snooper computer,’ as its been nicknamed). The software is called Connect and it’s a highly sophisticated, quick way of analysing huge amounts of information. HMRC invested in this very expensive tool in order to detect undeclared income and make sure all taxpayers are paying tax.
Connect finds fluctuations, patterns and associations between what seem to be totally unrelated pieces of data. This helps the government figure out when taxpayers’ declared income and lifestyle don’t match up, suggesting deliberate tax evasion.
Here’s What We’ll Cover:
Does HMRC Know How Much I Earn?
Yes, HM Revenue and Customs can see how much you earn, from your pay as you earn (PAYE) records and the information you provide on your self-assessment tax return. That’s just the figures you’re telling them.
If you have other undeclared income, HMRC use Connect and other methods to find it and make sure you pay your tax on it. You’ll need to pay the back taxes too. And you may be looking at the UK’s tax evasion penalty system, which can be quite severe.
Can HMRC Trace Bank Accounts?
HM Revenue and Customs has wide-ranging powers to find the information they need to get people to pay tax on their income, including your bank account. They don’t disclose all of the information sources that they feed into Connect, but these are definitely some of them:
- Other government departments and agencies: DVLA, DWP, the Land Registry, Border Agency, Companies House, electoral role, council tax records.
- All tax returns, including income tax, value added tax (VAT), corporation tax and PAYE.
- Financial records held by: Bank and building society accounts, online payment providers, debit and credit card accounts, credit reference agencies, crypto asset platforms and insurance companies.
- Financial information about your situation in other countries through the new global strategy to tackle tax havens, called the common reporting standard.
- Online sales websites like Amazon, eBay and Airbnb, and property websites like Rightmove and Zoopla.
- Social media: Everything that you put out there on Facebook, Instagram, LinkedIn, Twitter and any other social networking site.
- Even more peripheral information can help HMRC discover undeclared income and get the Treasury’s money back. Flight sales, passenger manifests, the Charities Commission and Google Earth may help to build the case against people who are trying to hide some or all of their income.
How Can I Tell If HMRC Is Investigating Me?
You will get a letter from HMRC telling you that you are under investigation for suspected tax fraud. A number of things can trigger this: Inconsistencies on your tax return, a tip off from someone, an HMRC focus on your industry, or something highlighted by Connect.
When you find out you’re the focus of a compliance check, you need to get professional help as soon as possible. It may be the case that this is just a strange anomaly in the system and there ends up being no case to answer. But it isn’t wise to try and tackle an HMRC investigation by yourself. Even though you have all your paperwork in order through FreshBooks and you haven’t deliberately tried to evade tax payments, you still need your accountant to check through all the finer details of your financial position.
Does HMRC Always Prosecute?
Right now, if you have income that you haven’t paid tax on, you need to get professional help straightaway. The sooner you tell HMRC, the better the outcome for you. For example, if you approach them about undeclared income before they even suspect you, you’re unlikely to face prosecution.
Essentially, the government wants all income to be declared, and to collect all the money it expects. People who are investigated and found to have not declared income will face penalties, and have to repay the tax they owe. HMRC can go back 20 years if it suspects you are deliberately evading tax. But it may also enter into agreements with taxpayers in order to make these payments within the scope of their earnings. The priority is reclaiming the tax owed, and prosecution is the final stage of a much more detailed progression.