HMRC is in the process of a 10 year transformation programme designed to create a "tax authority for the future". In the 2021 Budget, it was announced that HMRC will receive further investment of £180 million in 2021-22 for additional resources and new technology.
Although HMRC currently has access to unprecedented amounts of data, the additional investment in technology and personnel to process and analyse it will be key in enabling HMRC to effectively and efficiently make use of that data in its investigations. The funding will also contribute to the development of new ways to tackle modern challenges faced by the enforcement agency, such as cryptocurrency and block chain technology, all of which will assist HMRC to realise its ambition to become one of the most digitally advanced tax administrations in the world. We consider below the challenges and opportunities HMRC faces in its strive to meet that aim.
Common Reporting Standard ("CRS")
Since 2017 HMRC has received an enormous amount of data for individuals as a result of the CRS. This global system allows for an automatic information exchange between financial institutions and tax authorities based in any of the over 100 jurisdictions that have adopted this standard. In 2020, under the CRS, HMRC received access to details of around 84 million bank accounts. The information exchanged under the CRS includes key data including the name, date of birth and tax reference of the account holder, details of the financial institution, account number and the total payments and account balance.
Upon the introduction of CRS this unprecedented level of transparent financial information was expected to have an explosive impact on combating tax evasion by enabling HMRC to tackle non-disclosure of "tax haven" trusts or foreign income. HMRC currently uses the CRS data to inform its investigations and identify those who may be misreporting their tax position, however, there is potential for the data to be used to greater effect through better use of Artificial Intelligence ("AI") to assess and act on the data.
Teething problems with the way the data is processed currently has meant that it has not been as reliable as hoped. It has been widely reported that the data supplied under CRS has been found to be inaccurate on a number of occasions as a result of computation issues when the data is being transferred and compiled. However, as the data available through CRS is increasing each year the potential for this data to be used effectively in investigations will also grow.
Keeping up with cryptoassets
Much has been said about the challenges posed to tax administration by the fast growth of cryptoassets. In recognition of these challenges, at the end of March 2021, HMRC published its Cryptoassets Manual which sets out how it intends to treat this asset class for the purposes of taxation for both businesses and individuals.
In its manual, HMRC accepts that "the tax treatment of cryptoassets continues to develop due to the evolving nature of the underlying technology and the areas in which cryptoassets are used". The guidance stresses that the onus is on the taxpayer to keep records of cryptoasset transactions but otherwise HMRC's approach to investigations and enforcement where cryptoassets are involved in the avoidance of tax is far from clear. However, it remains certain that this is another area where HMRC will want to focus resources given the hurdles that the lack of transparency in cryptoassets creates when analysing tax affairs.
HMRC's Tech Upgrade
The increased funding for HMRC's IT systems announced by the Chancellor in the budget is intended to enable HMRC to carry out tax investigations with more efficiency and accuracy as well as to streamline tax collection. It is expected that the funding will also go towards employing more personnel to target non-compliance through illicit financial flows by assessing the vast amounts of data HMRC now has access to through the various channels such as PAYE, whistle-blower reports and CRS.
HMRC has already invested over £100m in its Connect computer system which went live in 2017. This software has proved successful in progressing investigations by gathering data to identify where tax liability has been misreported. In its first year it was credited with generating £3 billion in additional tax revenue. The system collates data from various sources including the Government and corporate databases such as DVLA, the Charities Commission, Visa and Mastercard and also taps into information on social media, web browsers and email records. The system flags any discrepancies between this information which doesn't tally with the tax returns which can then be investigated further.
In March 2021 HMRC entered into a contract worth £3.2m for software tools and access to databases that provide data on UK citizens and businesses. The tool has been described as a "trace and investigate solution". Under the terms of this deal HMRC have access to data of citizen's dates of birth, death, addresses, email and telephone details, and company information including financial data, addresses and telephone numbers of directors. The service will allow HMRC's fraud and risk investigators to "locate, confirm and validate an individual's identity" and to check phone usage and connectivity in real time.
Following contract extensions with BT and Accenture for IT services worth £120m in 2020, in April this year the Government agreed a contract with Amazon Web Services for £94m, under which HMRC will spend £29m for each of the next three years for public cloud services. HMRC has described this as an important part of the department's digital transformation strategy. However, HMRC has already been warned by Information Commissioner's Office that its use of digital services must not come at the expense of people's "fundamental right to privacy".
Given the size of HMRC's commitment during a period of economic recovery the Government will be keen to see results in terms of increased tax collection and enforcement. In this regard, HMRC has estimated that in tackling tax avoidance, evasion and non-compliance they will raise an additional £2.2 billion by 2025/26.
The impact on HMRC's investigations
In recent years the Government has pushed for greater transparency in tax affairs through global cooperation, the use of AI and data verification processes, such as the proposal to verify the identity of directors on Companies House. Government agencies are also under ongoing pressure to keep up with and combat the abuse of technological developments which make it harder for HMRC to identify assets and tax avoidance.
As with any new processes, HMRC is likely to run into challenges and set-backs, however, the wealth of data and potential technological capability means that, if these challenges can be overcome we could see significant innovation in tax investigations and enforcement as HMRC strive to justify the costs of these measures.