HMRC: Using technology and AI to close the tax gap

Artificial intelligence and HMRC’s supercomputer, Connect, are playing a bigger and bigger role in tax gathering. While this can be applauded for helping to improve at times woeful customer service and making tax collection more efficient, greater oversight of people’s financial affairs raises privacy concerns. So how is HMRC using new technology and where is it going with it?

HMRC Connect

HMRC’s Connect software is able to analyse very large amounts of data to find fluctuations, patterns and associations between what may seem to be unrelated data. It is able to spot when taxpayers’ income and lifestyle don’t match up, delve into numerous databases and open up people’s financial records.‍

‍What is Connect?

The super-computer cost £80 million to develop and went into service in 2010. In fact it is a network of databases that HMRC is constantly seeking to expand and was said to have 55 billion pieces of data on it by 2020. It can draw in data from non-tax sources, for example, it can trawl people’s social media to see if their spending and lifestyle match their declared income.

HMRC does not like to talk about Connect in public but we do know that it has two main parts. One is its analytical compliance environment (ACE), which lets specialist staff manipulate and analyse data in a hunt for discrepancies.

The other part is the integrated compliance environment (ICE), which presents links between data in a pictorial way. ICE can thus help analysts spot discrepancies between declared and other data.

It has more than paid for itself, with £3 billion in extra tax collected by 2020,which suggests use of it will only increase. The tax gap – the difference between what HMRC is owed and what it collects – was 7.5% in 2005-06. By the 2021-22 tax year the gap had fallen to 4.8% (an estimated £35.8 billion), thanks mainly to Connect.

What does Connect look at?

The software roams far and wide across businesses and individuals’ tax, financial and personal records. Furthermore, it helps the taxman to focus investigations more efficiently on those with uncollected tax liabilities or undeclared income and rely less on random checks. In fact, at least 90% of HMRC investigations are triggered by Connect data analysis, a big change from the past, when investigations would in most cases be prompted by tip-offs from those with a grudge against a taxpayer or from random checks.

We know from HMRC’s 2020 report that it can trawl through at least 30 databases, which at that time included those belonging to or related to:

• income tax, VAT, corporation tax and PAYE returns;
• bank accounts and pensions;
• credit reference agencies;
• credit and debit card accounts;
• trading websites such as Airbnb, Amazon and eBay;
• cryptocurrency exchanges;
• online payment firms such as PayPal;
• government agencies and departments such as Companies House, DVLA, the Land Registry and the DWP;
• social media networks;
• estate agent aggregators such as Right move and Zoopla;
• Google Street View;
• Council tax records;
• insurance companies;
• the electoral roll;
• foreign tax jurisdictions.

Connect and landlords

Connect is able to match up a Land Registry entry for a recently sold property with a subsequent rental listing for it on an estate agent’s website.

HMRC is also able to access the various tenants’ deposit schemes to trace landlords.

Connect and online letting and trading

From 1 January 2024 HMRC is asking big online platforms, such as Ebay or Airbnb, to start reporting the transactions of their users once they go above £1,000 a year. This data can be matched up with individuals’ tax returns. Under the same rules HMRC now has improved visibility of income people are making from letting rooms on sites such as Airbnb and Spare room.

Artificial intelligence and HMRC

AI is enabling HMRC to use its resources much more efficiently. Because the software can cross-reference taxpayers’ behaviour with huge datasets it can identify people more likely to be non-compliant. This helps it to avoid wasting time on less promising candidates for investigation as well as making its compliance checks more accurate.

Inquiries that could have taken months if done manually by staff can now be accomplished in hours or days.

However, at present HMRC mainly wants AI to improve customer service; for example, landlords may receive emails aimed at anticipating queries or helping them with their self assessment. It also has a role in casework to improve decision making.

Surprisingly, the 130 million or so letters a year HMRC sends out are not created using AI technology; instead they mainly rely on a variety of templates populated by the individual’s data. Inconsistent.

‍Small businesses

AI can help HMRC identify businesses it wants to investigate. The taxman will be watching out for;

• unusually high expenses;
• large cash payments, particularly if for items that a bank transfer or credit card would normally be used for:
• inconsistent income and expenses.

HMRC makes risk assessments to decide which businesses to investigate. These will be based on:

• the size of the business – larger ones are more likely to be audited;
• the industry the business is in: construction, hospitality and the motor trade are perennial favourites for extra scrutiny;
• the company’s location: tax evasion is more common in some parts of the UK than others. 

Making Tax Digital

From 6 April 2026 it will start to become compulsory for sole traders and landlords to use the Making Tax Digital (MTD) service. It is in operation now but the use of it is voluntary. Users are required to sign up with a compatible software provider that will enable them to:

• create and store digital records of business income and expenses;
• send HMRC quarterly updates;
• submit their tax return by 31 January;
• receive information from HMRC.

The service will give HMRC greater oversight of taxpayer information and it is to be expected that in partnership with Connect and AI systems the taxman will be able to reduce uncollected tax and improve the efficiency of its operations.

The future

HMRC’s powers to search through data have grown considerably in the past few years. However, concerns about privacy have fallen on deaf ears, not surprisingly when it has so much to gain from such pervasive oversight of individuals and businesses.

Labour has set up a panel examining how to increase tax compliance and improve HMRC’s service. The party pledged in April to raise £5bn more in taxes without increasing rates should it take power in July. It intends a good part of this to come from ending non-dom tax status; however, reducing the tax gap will have to do a lot of the heavy lifting to achieve such a large figure.

As part of this, Rachel Reeves, who is expected to be the next chancellor, would like to invest up to £555 million in HMRC to:

• increase the number of compliance officers to up to 5,500;
• expand digitisation; and
• support HMRC to work with third parties to expand its use of AI and to bring more focus to its modernisation.

It is very much to be hoped that AI will improve HMRC’s much-criticised service to individuals and businesses, with responsive and genuinely helpful chat bots replacing endless periods on hold. However, as tax collection becomes more efficient so too must taxpayers be more careful there are not errors or omissions in their returns and financial reporting.

Anyone who thinks they may have irregularities in their tax affairs should speak to a qualified adviser as soon as possible who can help them to submit a compliant return and correct past mistakes. 

If you think you may be at risk of an HMRC investigation or are unsure if your tax return is correct, please contact the friendly team at Finsbury Robinson on 0208 858 4303 or email us at info@finsburyrobinson.co.uk