There can be no argument that the saying 'information is key' is fully endorsed by HMRC.
For some time now, it has been able to obtain information about taxpayers from electronic sources. For example, it receives details of interest paid on UK bank and building society accounts annually, and can request details of property transactions and payments made by councils and housing associations. In 2014 it started to use data collected from merchant acquirers (businesses that process credit and debit card transactions) and, in 2017, overseas bank account data will be automatically exchanged around the world between consenting countries, including the UK.
Extending the data-gathering powers to digital
It came as no surprise, in July 2015, when HMRC issued a consultation document titled 'Tackling the hidden economy: Extension of data-gathering powers'. The consultation sought opinion on extending the merchant acquirers’ data collection legislation to cover data from business intermediaries and electronic payment providers.
This targeted extension, seemingly on the back of evidence obtained from the merchant acquirer data, clearly shows HMRC believes that a proportion of the hidden economy has now shifted from traditional cash transactions to on-line and digital trading.
Tackling the digital economy
In 2012 HMRC ran an ‘e-Marketplaces campaign’ specifically aimed at encouraging disclosures of undeclared on-line trading. That campaign closed in September 2012, resulting in settlements totalling in excess of £9.3m.
Since the campaign closed, HMRC has trawled the web using sophisticated ‘web-spiders’ and has increasingly used its powerful data analysis system, Connect, to risk assess the information it holds to help select cases for investigation.
However, does the data tell the whole story? Can the information be misleading? Clearly this would not be so in every case, but evidence and experience tells us that HMRC does not get it right every time. The unfortunate consequence of HMRC getting its analysis wrong can be a lengthy, intrusive and sometimes costly investigation.
Trading or hobby?
One area of concern is e-marketplace traders – specifically whether individuals are trading with a view to generating a profit or collecting as part of a hobby. So, can HMRC’s risk assessment make a distinction between an individual who is trading and one who is merely pursuing a hobby? The simple answer is no. Tax professionals and tax inspectors undertake hours of study to learn about the ‘badges of trade’ and, even then, both sides may have a differing view. Such a view can be exaggerated and an inspector may become blinkered when looking for or pursuing a case.
One such trading or hobby investigation initiated by e-data shows precisely what you can be up against. With the data analysis in hand, one experienced tax investigator has confirmed that, despite reasoned argument indicating that a hobby existed, he assumes 'every (taxpayer) lies' and 'believes no-one'.
The end game
HMRC is entitled to enquire, investigate and use the information it holds to identify undeclared tax liabilities and there is little public sympathy for those that operate in the hidden economy who are investigated and suffer stringent penalties. However, there should be an acceptance by HMRC that raw data does not always tell the whole story.
Dealing with any enquiry or investigation needs careful consideration and constructive argument, and never more so than in the question of whether an activity is a trade or a hobby.
The cost of a tax enquiry or investigation can be substantial. This cost can be effectively managed by taking advantage of the RSM Enhanced Tax Compliance Service.