I recently received a letter from HMRC suggesting that I may have previously undeclared bank accounts. After an exhaustive search I discovered that my pension scheme had a small bank account with a balance of £100 in it. I contacted HMRC who confirmed that this was the account in question and no further action was taken. How do HMRC obtain this information?
The letter you received from HMRC is known as a “nudge letter” and it is sent to taxpayers where HMRC hold information indicating that the taxpayer has income or assets previously undeclared. In many cases HMRC do not even attempt to corroborate this evidence with the individual’s tax returns which appears to be the case in your instance.
As businesses increasingly move towards the use of data analytic technology to improve their trading performance, HMRC has not been left behind in this technology drive. HMRC has a highly sophisticated information system called “Connect” which they are increasingly using to identify income or gains previously undeclared. The Connect system is essentially a spiders web which links the various transactions that we all undertake in our day-to-day lives together, providing a pattern of financial behaviour which if not corroborated by our declared earnings, can lead to an enquiry from HMRC. There is no hiding place from this electronic searching system as it is capable of identifying bank accounts, insurance policies, details of flights taken and cars purchased to name but a few examples.
We all leave electronic trails behind us by paying for things using products such as PayPal, credit cards and taxpayers often give financial details to credit agencies when they are applying for credit to purchase cars, jewellery etc. HMRC also has access to government records such as the Driver and Vehicle Licensing Agency, the Land Registry, electricity metering details, and it also has full access to offshore financial information which is shared with it under both the Common Reporting Standard and the Crown Dependencies and Overseas Territories Automatic Tax Information Exchange.
The problem with having access to all of this information is that quite often HMRC deploy it to arrive at an incorrect conclusion and the onus is always on the taxpayer to convince the Revenue that the returns which they have submitted are correct. Doing this can often prove an expensive process as enquiries can drag on for months and even years. Notwithstanding all of this, if taxpayers make a full and proper disclosure of their income and gains on an annual basis in their tax returns they have nothing to fear. It is also good practice to make use of the “whitespace” within tax returns to provide as much detail as possible to HMRC on certain transactions such as sales of businesses, sales of investments etc. Quite often by providing these details you can head off an unnecessary and costly enquiry.
The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.