HNWs: Understanding HMRC's Offshore Information Gathering Capabilities

Wealthy individuals have long been the focus of a substantial part of HMRC’s compliance activities, but a difficult economic climate together with a looming general election and possible change of government is likely to lead to even greater scrutiny of HNWs by HMRC in the short term.

Much of that scrutiny will be driven, as it is now, by the vast amounts of information HMRC gathers about the financial affairs of HNWs and which it uses to identify potential non-compliance risks and inform its decisions on the civil enquiries and criminal investigations it undertakes. 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 efficiently managed.  In this article, we focus on HMRC's offshore information gathering capabilities. 

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 advises that it 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. The key sources are as follows:

HMRC's "Connect" computer system and HMRC sources

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

While it is difficult to obtain any official statements on Connect, it has been said 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 (FIS) and the Counter-Avoidance Directorate and, as part of their activities, they obtain large amounts of information which they share with each other. Other potential internal sources of information on HNWs include the Trust Registration Service, the Register of Overseas Entities, and the World Wide Disclosure Facility.

Foreign sources of information on HNWs

HMRC is increasingly 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 are:

•  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 measure. 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 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 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 and that may make provision for the exchange of information.

Tax crime has become increasingly complex and international in nature as global economies and technology has developed.  HMRC have been building their global connections and data sharing capability in order to prevent taxpayers slipping between jurisdictional cracks.   At the cornerstone of this,  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 crime.  The J5 is an alliance of tax authorities from the UK, Canada, the Netherlands, United States and Australia who work together to gather information, share intelligence and conduct co-ordinated operations against tax fraud.  The J5 have also invested in a digital platform which enables the countries to compare, analyse and exchange real-time data to enable them to identify risk areas and financial anomalies to then investigate. 

Conclusion

HMRC has an ever-increasing arsenal of sophisticated tools for gathering offshore information about the financial affairs of taxpayers and, perhaps not surprisingly, HNW individuals are a particular focus when it comes to deploying those tools. 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 place taxpayers at a disadvantage when it comes to challenging HMRC's enquiries and investigations. It is therefore crucial that HNWs familiarise themselves with the wide range of sources from which HMRC can and does obtain information about their financial affairs, and consider what that might mean for their own tax compliance.

This article was first published in issue 15 of Private Client Magazine.