How does HMRC select tax returns for enquiry?

When the Inland Revenue and Customs and Excise merged in 2005, the newly created HM Revenue & Customs (HMRC) was left with a series of fraud detection systems containing huge amounts of raw data. The systems were not integrated, information was unmatched and it took hours, sometimes days, for HMRC investigators to bring all the details together and profile potential enquiry cases.

Since then, however, the department has made significant progress in organising and analysing the enormous volume of data it receives and acquires.

 

Risk and Intelligence Service

The selection of enquiry cases used to be conducted at a local level by comparing similar trades and professions within the geographical area and analysing the business results achieved. Almost all enquiries now originate from the Risk and Intelligence Service (RIS) within HMRC. RIS considers risk on a national level rather than a local one and builds information packages to help HMRC investigators pursue enquiries.

 

Connect

Connect is the name of HMRC’s award-winning data system which helps RIS in the selection of enquiry cases. Data from over 28 different sources is fed into Connect, including property transactions, tax return information, loans, bank account details, employment data and even referrals from the Tax Evasion Hotline.An analytical platform is used by 150 Connect data specialists to apply profiling and modelling techniques to look for patterns and behaviours.

Once this work has been completed, the analysts refer cases for investigation.3,200 tax investigators then use a visualisation tool, similar to a spider’s web, to navigate around all the data.When a risk has been identified, the next step is to decide on the method of approach and the level of compliance check. This can involve a ‘light touch’ advisory intervention to a full-blown enquiry.

As of April 2013, Connect had delivered an extra £2.6 billion in revenue for an investment totalling around £45 million. Needless to say HMRC is very proud of the results to date, not just because of the additional tax take but because of the productivity benefits. Fewer staff are now required to trawl through reams of raw bulk data and investigators are concentrated on the highest risk cases.

 

Enquiry targets

Campaigns and taskforces invariably give the biggest clues as to where HMRC sees a widespread compliance risk. Most recently there has been a clear steer towards potential property income omissions. The Property Sales Campaign, which closed in September 2013, gave people an opportunity to voluntarily disclose potential capital gains tax liabilities following the disposal of a residential property. It has been almost immediately followed by the Let Property Campaign, which is encouraging people with undeclared rental income to come forward.

Taskforces started this year to focus on sectors including second hand motor dealers, road transport and construction. The recently launched ‘hidden wealth’ taskforces across the Midlands, South and South East have the potential to be controversial as they are targeted on people suspected of living beyond their means, based on their declared assets to HMRC.

 

Summary

HMRC has brought operational research officers, data specialists and frontline tax experts together to form a results driven team to deliver compliance results.Connect cross matches over a billion internal and third party pieces of information and uncovers hidden relationships between people and organisations.

An opening enquiry letter is no longer issued based on a ‘hunch’ or a dubious entry on a tax return. HMRC investigators are reaping the rewards of the combined human and computerised approach and are infinitely better prepared than ever before.