HMRC making the right connections

inTAX reports on a presentation of HMRC’s ‘Connect’ system.

H M Revenue Customs (HMRC) recently invited members of the Tax Investigations Practitioners Group (TIPG) to a live demonstration of its Connect computer system. As a member of TIPG I was keen to increase my knowledge of the system HMRC uses to detect tax evasion, tax avoidance and non-compliance. On the evidence of the demonstration it is clear HMRC has developed a remarkably powerful and versatile tool that could well fulfil its aim of being the recognised market leader in the use of data analytics to drive its business. The Connect system was brought into use in 2009 having been designed by the defence contractor BAE Systems. It uses a unique fraud detection platform which allows HMRC to readily uncover relationships between people, businesses, organisations, addresses, bank accounts and a limitless amount of other data that they could not previously identify.

During the presentation HMRC’s Head of Risk and Intelligence Services reconstructed a previous search that, as its starting point, had used the sort code and number of a bank account into which a taxpayer had indicated he wished a refund of tax to be paid. In a matter of seconds Connect had established that the same bank account had been used in many hundreds of similar repayment claims and suggested the claimants all lived at the same address and were involved in similar low-turnover businesses. The search had in fact uncovered organised criminal activity on a major scale which the department was then quickly able to counter using the full range of its powers.

HMRC faces a UK tax gap estimated at £40bn and with a constantly evolving threat from tax evasion and organised tax fraud, it needs to deploy its resources to the areas of highest risk. Connect represents the results of an investment in innovation and the tools and methods available to tackle tax fraud and tax avoidance has allowed HMRC to exploit its information and intelligence more effectively. It now works faster and smarter with vastly improved detection rates with the aim of seeing the Treasury avoid significant financial losses and instead receive higher tax revenues

Against a cost of £45m, Connect delivered £2bn of additional revenue by the end of 2012. Using the software HMRC has the ability to sift through data held on third party systems such as H M Land Registry, Companies House, DVLA, other government departments, social media sites and Electoral Registers and combine this with the vast amount of information it routinely receives. It then compares this to self-assessment records to identify taxpayers who might be failing to declare income or capital gains.

A number of the disclosure opportunities that HMRC has offered over recent years have been launched on the back of third-party data from hospitals, pharmaceutical companies, gas SAFE regulators and insurance companies. A further example of the use to which Connect is likely to be put can be seen in measures introduced by the Finance Act 2013 which require the companies who facilitate payment card transactions for retailers to hold onto transaction data for four years. The new powers HMRC has been given to gather this data, which is stored by banks and other ‘merchant acquirers’, is an obvious move to clampdown on tax evasion and Connect is expected to very quickly turn the raw data into valuable intelligence for use by its compliance and investigation teams.

HMRC has so far trained 3,500 front-line investigators to navigate around the data using a visualization tool. This gives them an intuitive view of the taxpayer, or the entities associated with the taxpayer, so it is much faster and easier for them to find associations in the data. There is also an analytical platform used by HMRC data analysts and statisticians who look for patterns and footprints in the data to identify certain behaviours. Once they’ve spotted this behaviour, they link it in with the visualization tool and send it as part of a case pack directly to an investigator, where the research continues. Connect has dramatically improved HMRC’s productivity with the number of staff carrying out bulk risk assessment reduced by 40 percent. In addition the teams of investigators have been better able to target high risk cases.

The UK government has allocated resources of £917m to tackle tax evasion, tax avoidance and general non-compliance and is anticipating a major return on investment in the form of £7 billion additional tax revenues. It is clear that high-performance analytics that Connect delivers to HMRC will play a vital role in that pursuit.