HMRC's offshore information gathering powers

In this blog we consider HMRC's offshore information gathering powers and, in particular, their application to High Net Worth (HNW) individuals. This blog is based on an article written by Liam McKay and Michelle Sloane that appeared in Issue 15 of Private Client Magazine in July 2024.

Background

Wealthy individuals have long been the focus of a substantial part of HMRC’s compliance activities. However, a difficult economic climate, together with a new government with a wide-ranging tax agenda, is likely to lead to even greater scrutiny of HNWs by HMRC in the short to medium term. Much of that scrutiny will be driven by the large amount of information HMRC gathers in relation to the financial affairs of HNWs. It uses such information to identify potential non-compliance risks and inform its decisions regarding the commencement of civil enquiries and criminal investigations. Understanding the key aspects of HMRC’s information gathering capabilities, including how and from where, HMRC obtains information, is therefore critical to ensuring that the tax affairs of HNWs are effectively managed.

Wealthy taxpayers

Wealthy taxpayers are dealt with by the Wealthy Team within HMRC’s Customer Compliance Group. Wealthy taxpayers are defined by HMRC as individuals with incomes of £200,000 or more, or assets equal to, or above, £2m in any of the last three years.

HMRC applies a risk-based model utilising high quality intelligence to identify wealthy taxpayers with potential errors in their tax returns. As to that intelligence, HMRC holds significant amounts of information collected from both internal and external sources.

Key sources of information

1.  HMRC's "Connect" computer system and other intelligence sources

HMRC maintains a high degree of secrecy around its Connect computer system, its capabilities and how it operates.  Connect is a sophisticated data mining system that sifts through databanks of personal and commercial information and compares that information against that provided to HMRC by taxpayers. It looks for discrepancies in the data to identify potential non-compliance, which may lead to an HMRC enquiry or criminal investigation.

While it is difficult to obtain any official statements on Connect, it has been reported that the system sifts more data than that stored in the British Library, and the information it can gather includes everything from bank records, land registry records and DVLA records to information on online platforms and social media. It is also understood that Connect interfaces with British Overseas Territories and around 60 other OECD countries. 

As well as Connect, HMRC utilises its own internal sources to obtain information about HNWs. HMRC is a vast organisation, with various teams and directorates responsible for different parts of the tax system. They include the Wealthy Team, HMRC’s Fraud Investigation Service and the Counter-Avoidance Directorate. As part of its activities, HMRC obtains a large amount of information which it shares internally within the organisation. Other potential internal sources of information relating to HNWs include the Trust Registration Service, the Register of Overseas Entities, and the World Wide Disclosure Facility.

2.  Foreign sources of information

HMRC is increasingly becoming more connected with regulators and financial institutions abroad, giving it access to unprecedented levels of financial information about HNWs at an international level. The key mechanisms by which HMRC obtains information from, and indeed shares information with, foreign sources include:

• The Common Reporting Standard (CRS), which was developed by the OECD and provides for the automatic exchange of financial account information between those jurisdictions that have signed-up to the CRS. To date, more than 100 jurisdictions have committed to adopting the CRS, and a significant number of countries have activated agreements in place to exchange information with the UK, including the Bahamas, Barbados, the British Virgin Islands, the Cayman Islands and the Isle of Man. The International Tax Compliance Regulations 2015, require UK financial institutions, such as banks and building societies, to collect, maintain and report information for exchange with other CRS jurisdictions.
• Tax Information Exchange Agreements, which are described by HMRC as bilateral agreements under which territories agree to co-operate in tax matters through exchange of information. The UK has entered into such agreements with a large number of countries, including the Bahamas, Belize, British Virgin Islands and the Isle of Man.
• Tax treaties, which are bilateral tax agreements between the UK and other countries, often provide for the exchange of information between the parties to the treaty.

Tax crime

HMRC is a founding member of the joint chiefs of global tax enforcement (J5), which was formed in 2018 in response to a call from the OECD for greater international co-operation to tackle tax evasion. The J5 is an alliance of tax authorities from the UK, Canada, the Netherlands, Australia and the United States, who work together to gather information, share intelligence and conduct coordinated operations against those suspected of tax fraud. The J5 has also invested in a digital platform which enables member states to compare, analyse and exchange real-time data to enable them to identify high risk areas and financial anomalies to then investigate further, either individually or on a collective basis.

Comment

HMRC has an ever-increasing array of sophisticated tools to assist it to gather offshore information concerning the financial affairs of taxpayers. Perhaps not surprisingly, HNW individuals are a particular focus for HMRC when utilising its information gathering capability.

The advent of automatic exchange of information and AI developments in particular, will make HMRC’s task of ensuring tax compliance easier than it has been in the past and will likely lead to more enquiries and criminal investigations. It is therefore important that HNWs are aware of the wide range of sources from which HMRC can, and does, obtain information concerning their financial position and ensure that their affairs are fully tax compliant, otherwise they risk an HMRC enquiry or, in a worse case scenario, a criminal investigation.