‘How does HMRC know I have undisclosed income?’

magnifying glass on a websiteAre taxpayers with undeclared income like needles in a haystack – or are they sitting ducks for the taxman?

As the Government looks with renewed vigour at tax avoidance and tax evasion in order to raise the tax take, many of you are asking: ‘How can HM Revenue & Customs (HMRC) find out about my undisclosed income?’

As I discussed in a previous post, HMRC is looking to target high net worth individuals who may have undeclared income or gains. But how do HMRC’s investigators separate the fully compliant taxpayers, whether high net worth or not, from those who have undisclosed tax liabilities?

Let me count the ways…

1. Tracking tools and search engines

The tax authorities have a range of information-gathering tools at their disposal, some specialised to HMRC – note its recent investment in new web-trawling software to help catch eBay traders and others – and some publicly available, such as internet and social media search tools.

2. Social and traditional media alerts

Those posing in front of their yacht on a social networking site while declaring next to no income on their tax returns will be of immediate interest to HMRC (HMRC also has access to shipping registrations). Press articles and media coverage have also long been used by HMRC as the trigger for further investigation into an individual’s affairs. Once HMRC has a suspicion that an individual has underpaid their tax liabilities, it has a range of powers and tools available for it to drill down into the individual taxpayer’s affairs.

3. Statutory demands for information

Let’s look at the example of buy-to-let landlords who have missed some of their rental income off their tax returns – and how HMRC may go about sourcing information that will help with their enquiries.

Firstly, HMRC has the statutory power to issue a demand to any tenant (whether a company or an individual), compelling them to inform HMRC how much rent they pay and to whom it is paid. This information can then be compared to the landlord’s tax return and is therefore a relatively simple way for HMRC to identify whether the income has been declared correctly.

4. Phone checks and official records

Rental adverts may also be reviewed and lettings agents may be contacted. Remember, it is relatively quick and easy for HMRC to check with the Land Registry who owns a specific property. HMRC will also have access to housing benefit records.

It is similarly difficult to escape HMRC’s clutches when the time comes to selling the property. HMRC’s inspectors have long reviewed the local papers for houses for sale and the internet makes this process even easier, especially with the abundance of websites that show historic house sale prices.

5. Information-trawling software

However, HMRC has also recently invested in a new computer system. This system allows HMRC to bring together information on property sales and can pull together a historical list of properties purchased by a landlord. This information can then be compared to what the landlord has declared to be chargeable to capital gains tax (CGT).

6. Hotline tip-offs

In addition to the more sophisticated tools, HMRC still receives significant amounts of information via its Hotline from disgruntled third parties, such as neighbours or vengeful former spouses. While some of these should naturally be taken with a pinch of salt, many individuals have found themselves subject to serious tax investigations following a tip-off from a wronged former spouse, neighbour or business rival.

Ultimately, it is a far better idea if you do have any undisclosed tax liabilities to come forward before HMRC finds you. Those who make unprompted disclosures will face far lower penalties than those found by HMRC’s investigators, and once their tax affairs are up to date will have the peace of mind that they no longer have to look over their shoulder, fearful of that HMRC enquiry letter landing on their doormat.

Image: © Danard Vincente