HMRC: What it can and can't find out about you

Anyone who does a self assessment, especially if they do it solo without an accountant, will have had at least one queasy moment after filing it. It’s all too easy for the busy self-employed trader or individual to overlook a payment or miscalculate an allowance. Furthermore, HMRC’s powers to detect error and fraud are increasing, abetted by artificial intelligence and its mighty supercomputer, Connect.

So to prevent sleepless nights it is important to know the limits on HMRC’s powers to find out about you and your personal finances, and what you can do if you realise you have got undeclared income. 

Can HMRC find out how many bank accounts I have?

Despite increasingly powerful software HMRC does not randomly search through UK banks’ customer information to find out the names of their account holders. However, it can potentially detect non-disclosed savings and current accounts via individuals’ credit reports. The providers of these – Experian, Equifax and TransUnion – do share data with HMRC to prevent fraud and crime 

Can HMRC look into my bank account?

HMRC has the power (known as a financial institution notice or FIN) to make financial institutions give it information or documents enabling it to check someone’s tax position or collect a tax debt. Taxpayers cannot stop a FIN from being issued; however, the use of one should be reasonable and is subject to safeguards to protect against arbitrary use.

In addition HMRC requires banks and building societies to submit information every year about interest paid or credited to what it calls ‘reportable persons’. 

Will HMRC know about my online trading or holiday let?

From 1 January 2024 HMRC is asking big online platforms, such as Ebay or Airbnb, to start reporting the earnings of their users. Before this date it was only able to request this information. There is an implementation period till 31 January 2025 for platforms to tell HMRC if they fall under the new rules. If they do, they will have to report users’ data every year. 

This requirement will affect anyone with a ‘side hustle’ such as an Ebay or Etsytrader or someone who lets rooms on sites such as Airbnb or Spare room and makes a regular income from it.  

Landlords

HMRC is able to matchup a Land Registry entry for a recently sold property with a rental listing for it on an estate agent’s website. 

The Renters Reform Bill makes provision for a private rented sector database. If and when this bill becomes law private landlords must register both themselves and the dwellings that they let out on the database. At time of writing it is not known if an incoming Labour government would pick up this bill.

Data Protection and Digital Information Bill

The Data Protection and Digital Information Bill would allow the Department for Work and Pensions (DWP) to obtain financial information from banks and building societies to check people on benefits do not have undeclared assets or income.

A wide range of benefits would be caught by the proposed legislation. Currently, the DWP can obtain data about an individual where it suspects fraud or error. The new legislation would enable it to access anonymised data and examine individual accounts. This could extend to landlords’ bank accounts if their tenants are on housing benefit and the landlord receives the rent directly. 

The fate of the bill will depend on which party wins the general election on 4 July.

Cryptocurrencies

Some investors have made big gains from the rise in value of the likes of bitcoin. These gains are of course taxable. Currently, HMRC has no particular powers in relation to cryptocurrencies; however, in 2021 it issued notices to crypto exchanges requiring them to provide it with information about accounts held with them.

How do I know HMRC is investigating me?

HMRC does not have to tell individuals that it has begun to investigate them. Investigations come in three types. 

Random check

As the phrase suggests, HMRC will investigate an individual without cause. 

Aspect inquiry

Here only a part of the tax return will be investigated, possibly as little as one section.

Full inquiry

All financial records will be scrutinised. Often this will be when HMRC thinks there has been a significant error in a return; it won’t necessary be assuming there has been an attempt at evasion.

What could trigger a check?

HMRC is more likely to investigate people who:

• file their tax return late;
• have mistakes in their returns;
• have an offshore bank account.

What if HMRC discovers unpaid tax?

A discovery assessment may be issued if:

• a return has an underassessment of tax;
• an amount of income tax or capital gains tax should have been included but has not;
• an excessive amount of tax relief has been given.

The discovery assessment can only be issued if HMRC has reason to believe:

• the return was filed carelessly or the mistakes were deliberate;
• HMRC could not have been expected to know of the tax errors before the deadline for a notice of enquiry.

How can I avoid being prosecuted?

If there are major errors in your tax return you can reduce the likelihood of a prosecution. 

• Be upfront about irregularities. Tell HMRC even before an investigation starts.
• Do not falsify documents.
• Tell HMRC about undeclared income or unpaid tax before the sums get too large. Taxpayers whose undeclared income is over £50,000 are much more likely to be prosecuted.

Taxpayers who continue to try to mislead HMRC after it has begun an investigation will receive much stiffer penalties.

HMRC’s powers

The UK’s tax gatherer has civil and criminal powers, see the accompanying article on HMRC and businesses, which covers this area in more detail. 

In a criminal investigation, tax officials have the power to require information to be produced, apply for and execute search warrants, search suspects and premises, and recover criminal assets.

Civil powers

These are much more commonly exercised than criminal powers.

Compliance checks

A compliance check can be used to check people’s position relative to the various taxes they might be due to pay. Typically this would be self assessment or stamp duty payments. These checks can be made before a tax return has been submitted. 

HMRC civil investigations

HMRC is able to offer a contract (known as a CDF) whereby taxpayers give a full, honest and accurate account of irregularities in information submitted, which includes admitting the deliberate avoidance of paying tax to HMRC. In return they will not face criminal prosecution unless HMRC believes the disclosure was incomplete or it detects continuing activity that it regards as potentially fraudulent.

Taxpayers can appeal against assessments and penalties, and the CDF is not used in cases of careless or genuine error.

Time limits

HMRC can launch a basic inquiry up to a year after the self assessment was filed. It can then go back four years if it suspects innocent errors, six years for careless or negligent errors and as much as 20 years if suspects evasion.

In the tax year 2022-23, officials were believed to have investigated 248,000 people and businesses. This is up from 232,000 in the previous tax year. More than 12 million people do a self-assessment each year, suggesting the likelihood of a random check is low.

Can HMRC find out about overseas bank accounts?

Yes. HMRC has information-sharing agreements in place with other countries’ tax authorities. These agreements extend to overseas investments even if made indirectly via an investment firm. The information shared can be detailed and include sums held in foreign accounts. Similarly, non-UK citizens resident in Britain will have information sent by HMRC to the tax authority of their own country.

Asset and bank account freezing

HMRC can apply to the courts to have the assets frozen of a person involved in tax avoidance schemes from whom it is seeking a penalty.

In addition, HMRC investigators can apply to the magistrates courts to freeze bank or building society accounts to enable investigation of whether or not money in the account is the proceeds of crime.

HMRC and technology

HMRC’s supercomputer, Connect, went live in 2010. It can access dozens of databases, including those of government agencies such as DVLA, credit agency reports, Rightmove and Zoopla, credit and debit card accounts, council tax records and so on. It can also look at social media accounts to see if a person’s income matches up with the lifestyle depicted. 

The Making Tax Digital policy of requiring financial records to be stored digitally by approved software providers is further improving HMRC’s visibility of taxpayers’ affairs.

Artificial intelligence is increasingly being used in data analysis, enabling HMRC to use its resources more efficiently. Investigations can now proceed far more quickly so HMRC has been able to increase the volume of inquiries it undertakes.

Given the increasing likelihood of errors being picked up, 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 0208858 4303 or email us at info@finsburyrobinson.co.uk