HMRC digs deep into your data

A quiet tax grab is going on — not of our money, but our data.

HM Revenue & Customs has long had access to information from bank accounts, pension savings, and overseas tax offices. Tax experts say it also secures data from credit card transactions, travel records, passports and even the driving licence authority.

But the growing power of digital communications and computing, combined with new regulatory powers, enables the tax authority to go further, deeper and faster in trawling for mind-boggling amounts of financial information. You may not know it, but HMRC could be crunching your data right now.

“The general public would be quite surprised at the information HMRC has on people,” says Tom Wallace, director of tax investigations at consultancy WTT and a former tax inspector. “In a digital world, assume that most things you’re doing are leaving a digital fingerprint and can find their way into the Revenue’s hands.”

Three recent moves highlight HMRC’s growing reach. First, the UK has become one of the first countries to begin implementing international rules agreed at the OECD, the rich states’ grouping, requiring digital marketplaces such as Amazon, Airbnb and eBay to share financial details of people selling on their sites with tax authorities.

Next, this year the UK tax authority will have new powers to obtain data from financial institutions and others. Unlike now, HMRC will not need the taxpayer’s consent or the approval of the independent tax tribunal.

Then there is the government’s flagship programme to make tax digital, which already requires some businesses to keep digital records and provide VAT returns through software. From April 2023 landlords and the self-employed with property or business income of more than £10,000 a year will be drawn in and made to keep digital records and report their income every quarter.

HMRC says: “Better use of data will help us deliver a digital tax system, which is easier to use, harder to evade or avoid, and builds trust by being fairer.” 

It adds: “Making Tax Digital is an important part of our 10-year tax administration strategy which makes the tax system more efficient and easier for customers to get tax right.”

It’s hardly surprising that tax authorities are interested in getting their hands on more of our data, as digitalisation affects all areas of life. The Covid-19 pandemic has hastened this trend as people turned from cash to digital, creating mountains of new electronic information.

For taxpayers, the shift could make dealing with HMRC easier as tax reporting processes are made more automatic. But it could also increase tax officials’ scrutiny of our lives: hopes of increased efficiency and more success in the fight against tax evasion are, for some tax experts, tempered by concerns about privacy.

FT Money looks at what digitalisation means — particularly the impact on taxpayers of the mushrooming use of third-party data reporting.

Tax doesn’t have to be taxing

Greater digitalisation could clearly cut a lot of personal interactions with the tax system — saving taxpayers time and effort.

Most company and public sector employees already have little to do directly with HMRC as they generally have their tax deducted by employers under the pay as you earn (PAYE) system.

But self-employed people, company directors, and those with capital gains or other forms of income to declare — such as rent — must manage their tax themselves via an annual return. So must anyone earning more than £100,000 a year.

About 11m people now fill out self-assessment returns. The taxpayer, or their accountant, has to keep records and collate a wide range of information. Bank interest certificates, for example, rental statements from letting agents, pension contributions summaries, dividend records, charity donations and tax documents such as P60s and P45s.

But a recent report by the Office of Tax Simplification, a statutory body, noted that on top of this, HMRC already receives a large amount of data from third parties.

Today, this information from banks, building societies pension providers and so on, is primarily used in compliance checks — for example in looking into possible tax evasion.

The OTS suggested that HMRC could make the data visible to taxpayers and “pre-populate” tax returns — that is, fill in information before taxpayers receive their forms. This could save many taxpayers time — sparing some the chore of doing the yearly tax return altogether and reducing form filling for others.

Unfortunately, and perhaps somewhat ironically, HMRC could not provide the OTS with data as to how many people could potentially be liberated from compiling a tax return if more third-party data was shared.

But most taxpayers think they would gain. Three-quarters of people who completed a survey for the OTS thought it would be simpler and easier if third parties could provide information to HMRC on their behalf.

Public confidence in sharing sensitive financial information online seems to be growing. The OTS cited statistics showing 76 per cent of adults used internet banking last year, compared to just 30 per cent in 2007.

John Cullinane, director of public policy at the Chartered Institute of Taxation, a professional body, says it would be an “obvious win” if tens of thousands of companies provided the data for tax returns, rather than millions of individuals.

The Treasury argues that greater use of third-party data, if aligned with HMRC’s systems, could be used “so that taxpayers are proactively offered new and innovative services”.

In a 10-year tax administration strategy published last year, HMRC and the Treasury suggested that real-time data could have accelerated Covid support relief for the self-employed.

The same strategy document also sets out a picture of what taxpayers can expect from their HMRC digital accounts in the future.

Existing personal and business tax accounts, used by individuals with businesses, are due to be replaced by a “single customer account”, bringing data together. Though no launch date has been announced, the project received £68m in the March Budget, suggesting it is moving ahead.

The OTS supports the scheme and recommends using the account to make visible existing third party data shared with HMRC and suggests new data sources like dividend and investment income, which are not currently shared by third parties, could also be included. It hints that the single account could be used to give tax reliefs automatically, such as on pension contributions, to people who might not claim them — providing legislation is changed to allow this.

If the government takes up this idea, the data exchange could result in more payments from HMRC to taxpayers, as well as the other way around. Approximately 1m people entitled to higher or additional rate relief on pension contributions in the 2017-18 tax year failed to claim, according to estimates from PensionBee, an online pension manager, cited by the OTS.

The unclaimed tax relief was estimated to be worth £770m for higher-rate taxpayers and £60m for additional-rate taxpayers. HMRC disputes the figures, saying the amount of underclaimed tax relief was around half that suggested by PensionBee. But it would still be significant to those involved.

The Treasury would clearly stand to gain much more — with increased reporting of people’s finances by third parties generating expected gains in tax receipts.

The hope is not only that more tax evaders will be caught but also well-intentioned taxpayers will make fewer mistakes and omissions on their returns.

“Tools enabling real-time risk assessment will support targeted interventions to prevent unintentional errors much earlier in the process,” the government strategy explains. “Businesses and taxpayers should be better protected from those who choose to cheat the system, as HMRC will be better equipped to tackle deliberate non-compliance and criminal behaviour.”

Tax lost to “failure to take reasonable care”, was estimated at £5.5bn — the largest reason for lost tax in the latest HMRC accounts. Tax lost to error was a further £3.1bn.

In comparison, tax revenue lost to evasion was estimated at £4.6bn and criminal attacks cost an estimated further £4.5bn. Tax lost due to the hidden economy was £2.6bn.

The numbers cover a spectrum, as people who seek to hide their income or assets from HMRC include everyone from organised crime gangs engaged in drugs, smuggling of tobacco and alcohol or VAT fraud, to people operating in the cash economy — for example in the building trade.

People whose entire income is unknown to HMRC are known as “ghosts” in the tax world. “Moonlighters” are those who report only part of their income.

The overall tax gap — the difference between the tax HMRC calculates is owed and what it actually receives — was £31bn, representing 4.7 per cent of total tax liabilities. Recovering even a slice of this is for the tax authority a huge prize — well worth the human and technological effort.

Privacy versus convenience

But HMRC’s approach raises serious questions. One challenge is providing for digitally-excluded people — those without access to the internet or computers.

“The tax system must be designed for all from the outset,” says Victoria Todd, head of the Low Incomes Tax Reform Group (LITRG), an educational tax charity. “Those who have difficulties using digital systems need to be catered for from the start, rather than as an afterthought.”

Meanwhile, a more fundamental problem is the huge scope of HMRC’s data trawl. Is it collecting too much data about too many people, when it would be better — and fairer — to concentrate on tools that focus on the worst offenders? Is it infringing personal privacy rights when it, for example, seeks online retail information and perhaps secures details of sex shop purchases? Can information gathered by HMRC be totally secure when, for instance, the US media recently published the leaked tax details of billionaires Jeff Bezos, Bill Gates and Mark Zuckerberg?

Dawn Register, head of tax dispute resolution at BDO, an accountancy firm, says her firm supports the digital agenda. But she says questions need to be asked about how much the government is “targeting the innocent” rather than using its data gathering abilities to “go after the bad people”.

She adds: “People who are making errors are doing that because the rules are so complex. What about the people who are outright hiding?”

Tim Stovold, partner at Moore Kingston Smith, an accountancy firm, believes increased use of third-party data would help prevent innocent errors and reduce lower-level tax evasion.

But he warns: “People who operate in the hidden economy are not just going to roll over. There will be a race for somewhere to put money in a place that doesn’t talk to HMRC . . . even if that’s cash under the mattress again.”

It will be crucial for personal data obtained by the tax authority to be secure and accurate. “The assumption is that computers don’t make mistakes,” Stovold says. Sometimes data sources are inaccurate and sometimes systems go wrong.

Stovold worries about the risk of a repeat — in tax — of the Post Office scandal which saw dozens wrongly convicted of fraud, theft or false accounting due to a faulty computer system.

The possibility of mistakes in the data used to pre-populate tax returns raises thorny questions about who would be to blame if a wrong figure were submitted.

“If it turns out that the third party sent the wrong data and a taxpayer has underpaid tax, who is responsible?” asks Sarah Saunders, partner at RSM, an accountancy firm. “Should the taxpayer be penalised for accepting data they have every reason to believe is correct?

Cullinane cites the case of the people who used tax avoidance loan schemes. When the schemes failed, responsibility for having underpaid tax primarily fell on the individuals, not the companies organising the schemes. “This is not just a theoretical thing,” he says. “It can be the individual left holding the baby.”

HMRC has said it is committed to protecting taxpayers’ data and rights to privacy and does so in accordance with all data protection laws, including GDPR.

But the risk of infringement of privacy rights troubles some observers. Filippo Noseda, a partner at the law firm Mishcon de Reya, has long campaigned on data security — particularly on the exchange of data across borders between tax authorities. He says tax authorities are interested in gathering more data and holding on to it for as long as possible, as this helps them in profiling people.

“In any other area this would cause outrage,” he says. “But because it’s tax, if you disagree all of a sudden you must be a baddie.”

But he thinks the only thing that might cause British taxpayers to pay more attention is a widespread hack of tax records — which has already happened in some countries, as in the leak of the US billionaires’ tax returns.

The problem, he thinks, is there is no “counterbalance” to the acceptance of more data gathering and sharing. “Nobody is willing to say ‘hold on a second, have we gone too wide here’?”