What do they know?
Usually, when a client receives an enquiry notice from HMRC, the first thing they ask me is “what do they know?” The truth is HMRC has a vast amount of information available to them and usually they know much more than you think.
At the heart of HMRC’s compliance effort is Connect. Connect is a supercomputer that links multiple databases and draws connections between you and others. Before HMRC even send you the opening letter, and despite the fact that their initial questions may give the impression they are on little more than a fishing trip, they will know what properties you own, the bank accounts and credit cards you hold together with balances, and what car you drive.
Third party info
It doesn’t stop there, though. HMRC receives regular data dumps from third parties. A merchant acquirer is the third party that processes debit and credit card payments and sits between the vendor and your bank. They therefore hold all the details of payments processed by any business and guess what, HMRC have legislated that they be provided with that information every year. It is therefore very easy for HMRC to compare this to the tax return and know whether the turnover is understated for the period, and quite frankly it has been the smoking gun in many a recent enquiry.
They can also use their powers to require third parties to provide information. This was most recently seen when they wrote to the big pharma companies asking for details of the payments made to contractors using a personal service company. In this instance, they used that information to write to all the intermediaries and claim that they were wrongly operating outside IR35. The aim was to ‘nudge’ them inside the infamous legislation and be treated like employees but without the employment rights that go with it.
Firm belief not fishing
And this is all before you bring in the long standing ‘intelligence’ provided by wronged parties. Spurned partners, both in life and business, usually know where the bodies are buried and are willing to ‘use’ HMRC to seek revenge. Whilst it will usually be tested it is in my experience easy to identify very quickly whether it is legitimate or malicious just by the level of detail, and therefore points the inspector in the right direction before they even begin.
Whilst I would never claim that HMRC operate on commercial terms, what they are good at is identifying risk and selecting the enquiries they believe will produce ‘yield’. Therefore, unless the dataset they have contains errors, there is a good chance that you have received an enquiry because HMRC has a firm belief that your return is wrong.
Consequently, it is important that you do not assume that HMRC is fishing. You will need to demonstrate that their intelligence is inaccurate or at the very least has been misinterpreted. Engaging an expert in tax investigations is highly advantageous in such circumstances. They will be alert to the latest trends, given that HMRC generally group their enquiries into ‘projects’. They will also ave you costs in the long run. A generalist tax adviser or accountant, in contrast, may only deal with 3 or 4 enquiries a year and not be alive to HMRC’s latest thought processes.
If you receive an enquiry from HMRC, get in contact for a free no obligation consultation to discuss how we can help.