Warning of innocent victims in taxman’s raid

Individual tax affairs in Scotland are coming under an unprecedented level of scrutiny as HM Revenue & Customs steps up its crackdown on avoidance and evasion.

The revenue is using greater access powers and increasingly sophisticated software to target hidden earnings and income, while new laws will soon allow it to take tax debts directly from bank accounts.

However, the initiatives could result in more people being unfairly penalised on the basis of inaccurate information or flawed systems, experts say.

Their warning comes days after it emerged that HMRC has set up a new taskforce aimed at identifying wealthy tax cheats in Scotland in a bid to recover up to £4.5 million of unclaimed tax.

It will focus on people with wealth indicators such as large properties, investments, boats and undeclared bank accounts that don’t tally with the information the revenue already has. Those judged as having deliberately failed to disclose all their income face hefty fines or even criminal convictions, said Michael Connolly, HMRC Taskforce Lead in Scotland.

“HMRC’s intelligence shows that people being targeted by this taskforce have no intention of playing by the rules,” he said. “Using information we hold, we can target people whose lifestyle does not reflect the tax they are paying. It’s not fair that a small minority are living millionaire lifestyles as a result of not paying the tax they owe.”

Scots with more modest means are being closely scrutinised too. Improvements to HMRC’s Connect system, which was first introduced in 2008, mean it is now able to analyse disparate information on individuals and compare it with tax records with a sophistication and speed not previously possible, according to Martin Bell, Glasgow-based tax partner at BDO tax advisers and accounts.

More than a billion items of data from 30 different sources are already within the scope of the Connect programme. That will increase significantly in September 2016 when HMRC will be allowed to access files held by banks and other finance firms based in UK tax “havens” such as the Channel Islands.

The software used by HMRC, which looks for inconsistencies in the income, assets and transactions reported by individuals, can process transactions in seconds that previously would have taken several months to analyse. Where discrepancies are found the revenue has the powers to rapidly issue demand notices for unpaid tax.

“Their thinking is that data on individuals from a diverse array of sources may show up discrepancies in individuals’ financial statements which are being interpreted negatively by the Revenue,” said Bell.

“The result is that many individuals may receive inflated demands for unpaid tax going back many years with little understanding of how or why this demand may have arisen.”

There’s also a risk that innocent taxpayers will be wrongly targeted by HMRC, said Bell.

“HMRC’s track record of implementing IT solutions is not a positive one and errors will definitely arise. This unfortunately means that taxpayers will need to waste time and money responding to these and correcting HMRC.”

People trading on websites such as eBay and Gumtree will be checked for undeclared income, he added. Such services are now obliged to give HMRC certain information on user accounts, including names, addresses and details of what they’ve sold.

“The issue at the heart of online trades is whether the individual is conducting a hobby or a business. Some of this could be explained simply by volume size. If an individual completes, say, ten trades a year then HMRC would be hard pressed to call them a ‘trader’,” said Bell.

“However, if someone has completed, say, 300 or more transactions in the last year, and is regularly offering up a selection of goods, then there may be some explaining to do.”

Buy-to-let landlords are under the microscope too, with HMRC looking for instances where property has been registered in their own name without declaring rental income.

Meanwhile, the tax office is gearing up to take advantage of new powers it will be given this autumn to access individual bank and savings accounts, including Isas. The Direct Recovery of Debts Law (DRD) was set out last year and included in last month’s Finance Bill. Under the rules, taxpayers who owe at least £1,000 – including tax that had been overpaid – could have the money taken straight from their bank account by HMRC.

The Institute of Chartered Accountants warned last year that HMRC would “inevitably” make mistakes that could have serious consequences for the individuals concerned.

However, the safeguards that the Treasury initially pledged to put in place were not included in the legislation that was rubber-stamped last month.

The government said debtors would get four chances to resolve the situation, including a face-to-face meeting. However, that promise was left out of the legislation that was passed in July. HMRC will instead need only to be satisfied that the individual concerned “is aware that the sum is due and payable”.

The government has also rowed back on the pledge that HMRC must leave taxpayers with at least £5,000 in their bank accounts. It now seems that the Finance Bill allows HMRC to leave accounts empty where it’s deemed appropriate.