Enhancing tax oversight with data-led compliance

As HMRC conducts its role as overseer of the UK’s tax environment, it continues to look at ways to enhance compliance amongst the business community. One way is the use of data to bolster enforcement efforts. John Lewis, senior consultant – tax investigations at Markel Tax explores the issue of data and how it is used by HMRC to drive a greater level of compliance.

With access to an extensive variety of data sources, ranging from financial institutions to social media platforms, HMRC is in the driving seat when it comes to tax compliance and enforcement. The continuing shift in the availability of, and ability to analyse, data represents a significant change in how our tax authority identifies and addresses non-compliance, something that businesses and their advisors need to be aware of.

Data available to HMRC is transforming their ability to monitor and target tax non-compliance. Financial institutions, government departments, overseas entities, and social media platforms provide rich pools of information that are allowing HMRC to conduct detailed analysis and build targeted compliance campaigns with a high-degree of both precision and success. This wealth of data means that HMRC can now employ a series of data-led compliance tactics, such as the popular use of nudge letters.

Nudge letters, a cornerstone of HMRC’s compliance strategy, have become even more effective in an era of detailed data availability. By using sophisticated data analysis techniques, HMRC can identify potential areas of non-compliance and dispatch nudge letters to groups of taxpayers who may be falling foul of the law. These letters, designed to prompt voluntary disclosure or corrective action by the recipient, require minimal resources for HMRC to administer yet can yield significant compliance outcomes. The scalability of nudge letter campaigns also allows HMRC to efficiently allocate resources, redirecting manpower to other compliance initiatives.

HMRC has been diverse in its approach to data and nudge letters with a wide variety of campaigns illustrating the diverse range of tax compliance issues addressed through data-led interventions. 

• Landlords frequently receive nudge letters about additional income streams through the analysis of Land Registry data
• Crypto traders are targeted about undeclared income using data from platforms such as Coinbase
• Heating engineers and plumbers have been prompted after running data models on typical earnings and profit numbers and targeting those falling outside certain parameters. HMRC is also able to cross reference information on licenses and qualifications and look at expected income of individuals with certain qualifications
• HMRC can analyse typical expenses vs incomes (gross profit ratios) for restaurants and target those that fall outside of normal parameters. Restaurants have to carefully manage issues such as the national minimum wage and tips to ensure they have been dealt with properly.
• HMRC can access data on disposed assets and shares that could give rise to CGT and target those involved with nudge letters 
• Online traders are on HMRC’s radar given their new powers to demand information from online trading platforms from the UK and around the world
• Directors and employees in receipt of benefit in kind (BIKs) payments can be identified and targeted should other data point to potential non-compliance 
• Recipients of government support schemes such as the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS) have been targeted, with HMRC leveraging data to verify eligibility and prevent fraudulent claims.

The huge amount of data that is now available to HMRC, and its evolving ability to analyse it, has enabled compliance campaigns to expand in frequency and nature, including new areas such as trading goods or crypto online. By analysing transactional data and cross-referencing with tax records, HMRC can identify individuals and businesses engaging in a whole variety of activities, enhancing its ability to run campaigns such as nudge letters that are helping to ensure compliance with tax obligations.