£4.6bn recovered by HMRC through data analytics tool ‘Connect’
A recent response to a freedom of information (FOI) request shows that HMRC’s use of an integrated compliance environment software (ICE) - more commonly known as Connect - has brought in £4.6bn of unpaid tax for the Treasury - an increase of 35% from the previous year.
While it is only one aspect of HMRC’s compliance strategy, Connect has become a major part of tax investigations. Approximately 4,300 HMRC staff use the tool to analyse data HMRC has received from a variety of sources, including overseas tax authorities, highlighting the importance of accuracy in tax returns. Even small inconsistencies can cause an enquiry to be triggered.
The rise of data-driven tax compliance
Due to HMRC’s increasing use of data analytics, individuals and businesses are more likely than ever to be flagged for review. As Connect can cross-reference against so many data points, it is improving HMRC’s ability to detect discrepancies which previously may have gone unnoticed.
The Connect tool is a graphical visualisation tool which allows HMRC to interrogate the large volume of data it has received from a variety of sources, including banks and property letting agents. Connect allows HMRC to identify patterns and connections which are not readily identifiable which it can then compare with information shown on a person’s tax return to detect discrepancies.
The Connect software was originally piloted in the early 2000s, meaning HMRC has had over 20 years to hone its use in analysing the vast amount of data it has accumulated for analysis. Since being launched, it has generated £3.4bn of additional annual yield on average. Over the past tax year, the data analysis tool has enabled 540,000 cases of undeclared tax to have been detected, although this may include all compliance activities such as nudge letters.
As you would expect with a tool that has access to such a large amount of information, HMRC has ensured it is heavily monitored and controlled so that it is not able to be exploited for the wrong reasons. It is mainly HMRC's Risk Intelligence Service (RIS) directorate which has access to Connect as they produce intelligence packages which are considered for an enquiry.
Connect is, however, only part of the intelligence which HMRC has open to them having announced a partnership with US data analytics organisation Palantir in an effort to implement even more sophisticated data analysis to be used within tax investigations.
What can cause an HMRC investigation?
There are multiple factors which can trigger an investigation, they can include:
- Inconsistencies in tax returns
- Accounting errors
- Random checks from HMRC
- Whistleblowing
Navigating an HMRC enquiry
Knowing what could cause an investigation can help taxpayers take proactive steps to mitigate risk, but if you are the recipient of a nudge letter or formal enquiry from HMRC, it is important not to ignore it.
The nudge letter is usually the initial step in a wider compliance check so ensuring your response is timely and appropriate can make a big difference in the outcome of the enquiry.
We’re here to help
Our Tax Investigations & Dispute Resolution team has extensive experience handling HMRC enquiries and understands how Connect and other similar tools are used, allowing us to help you navigate the process confidently.
If you have received a nudge letter, are the subject of an enquiry, or are looking to make a disclosure, please get in touch with a member of our specialist team or speak to your usual Azets adviser.