Digital Tools Revolution for HMRC

Investments in digital tools

Often our accountancy clients ask us for articles that they can pass on to their clients, which provide an update on the current HMRC approach to compliance work.  The following gives an interesting insight into HMRC’s use of digital tools, their undoubted effectiveness and the impact that it has had in respect of HMRC activity:

Since 2005/06 HMRC has made significant progress in closing the tax gap, which is the difference between the tax that should in theory be collected by HMRC and what is actually collected.  Despite this the tax gap still stands at a staggering £36 billion and consequently HMRC remain determined to reduce this amount through tax enquiries.

HMRC have invested heavily from this point of view, investing £1.8billion since 2010 in tackling evasion, but spearheading their approach is a further £1.3 billion investment in digital tools.  Taxpayers have seen some of the output from this digital investment, in particular through the introduction of Real Time reporting of PAYE.  However behind the scenes there has been enormous progress made in respect of digital tools which help HMRC become far more effective and targeted in respect of compliance activity.

In 2009 HMRC introduced Connect, a state of the art analytical software which HMRC use to determine who should be subject to an enquiry.  The Connect system quickly compares the information declared on tax returns against this enormous data warehouse and determines whether an enquiry is appropriate.

At Vantage Fee Protect we have certainly seen the impact of Connect, with an increase in the number of our insured clients who are subject to a tax enquiry in recent years.  Whilst this approach is undoubtedly effective, the reduction in human input and the reliance purely on software means that there is often a perfectly innocent explanation for the apparent gap.  Despite this accountancy fees are still incurred defending the position and can often equal or exceed the tax at stake.

On the flip side, with HMRC Compliance Officers working more efficiently and having more time, in-depth enquiries often become even more protracted, time consuming and costly to deal with.  Also compliance activity around PAYE and VAT still accounts for a large proportion of HMRC activity, with no specific reason being required to undertake a Compliance Review in this respect.

This investment in technology is set to continue, with billions of pounds worth of investment currently being poured into HMRC’s Enterprise Data Hub.  Currently HMRC data is held in 11 separate data warehouses, this single solution that will bring all data into one usable place.  Whilst this conjoined approach will undoubtedly bring benefits in terms of the service we receive as taxpayers, it will also allow HMRC to interrogate data even more effectively and target more enquiries as a consequence.

Credit has to be given to HMRC for investing heavily and effectively in order to quickly get up to speed with this digital age.  Undoubtedly this approach will help to target and reduce evasion and avoidance.  However what is also apparent is that the potential to be the subject of an enquiry has never been greater.  Indeed the value of having Tax Fee Protection Insurance has never been greater, which at a relatively low cost provides peace of mind against this increasingly sophisticated risk.

If Vantage Fee Protect can be of further help please contact us.  Visit here for more information on Vantage Tax Fee Protection.