How HMRC is Fishing for Your Tax Secrets

Have you ever wondered how HMRC gets so much information about taxpayers? Imagine a giant net that scoops up data from banks, credit card companies, and other sources to build a detailed picture of your finances without you even knowing it.

Casting a Wide Net: Bulk Information Powers

When HMRC wants to “go fishing” for tax data, it starts by casting a very wide net. This means it uses its bulk information powers under the Finance Act 2011, Schedule 23. With these powers, HMRC goes to third-party data holders—like banks or credit card companies—and asks them to provide large amounts of generic information about their customers.

• How It Works: Instead of targeting one person, HMRC collects data on thousands or even tens of thousands of people at once.
• Why It Matters: This method is supposed to keep individual taxpayers anonymous. Only if the data shows that someone is an “outlier” or if something specific seems wrong will HMRC zero in on that person.

In simple terms, HMRC’s first step is to gather lots of information without pointing fingers. They create a big pool of data and only focus on individuals if their numbers look unusual.

The Art of Targeting: Specific Information Powers

But what happens when HMRC becomes curious about just one taxpayer or a small group—like business partners? In these cases, HMRC uses a different set of powers under the Finance Act 2008, Schedule 36. This time, instead of casting a wide net, HMRC goes straight to the source.

• Direct Approach: HMRC deals directly with the taxpayer, asking for documents, explanations, and specific details about their tax situation.
• Why It’s Different: Asking third parties for details about specific individuals is not common. Before HMRC can do this, it has to show that the information is truly needed to check the taxpayer’s tax position.

This method is like using a fishing rod to catch one specific fish instead of casting a net for many. It’s meant to be used only when there’s a solid reason to suspect that something is wrong with a taxpayer’s records.

Promises and Protections: No Fishing Expeditions Allowed

HMRC has made some very important promises about how it will use these powers. Its Compliance Handbook Manual (CH229800) states that HMRC has assured Parliament that it will not use its powers for “fishing expeditions” or speculative searches. In other words, it promised not to go after taxpayers without good reason.

• Checks and Balances: There are many rules in place to protect taxpayers from unnecessary investigations. Once a taxpayer has filed their tax return and the enquiry window has closed, HMRC is not supposed to keep digging into that return.
• Self-Assessment Principle: This system is based on self-assessment. Taxpayers are expected to calculate their own taxes and be responsible for their own tax affairs.

Despite these safeguards, it is widely known that HMRC officers sometimes demand extra information under the threat of penalties. Many tribunals have heard cases where taxpayers complained about these so-called “fishing expeditions,” and quite a few of those cases have ruled against HMRC.

The Game Changer: Financial Institution Notices (FINs)

Here’s where things get even more interesting. In 2018, HMRC published a consultation document called “Amending HMRC’s Civil Information Powers.” They admitted that their current powers were nearly a decade old and not suited to today’s digital world. HMRC was embarrassed that other tax authorities around the world had much more advanced tools to gather information. They also worried that without new powers, they wouldn’t meet international reporting standards.

HMRC proposed two main ideas:

1. Option A: Let HMRC demand information from any third party without first asking a tribunal for permission.
2. Option B: Give HMRC new powers specifically for banks and similar financial institutions—since most international requests are for banking information.

Public concern over HMRC’s potential misuse of its powers led to a decision in favour of Option B. This new power is called a Financial Institution Notice (FIN). Under FINs, HMRC can now approach banks directly to ask for information, but with some important promises:

• Annual Reporting: HMRC must report back to Parliament each year to show how these powers have been used, which is supposed to keep them in check.

The First FIN Report: What Did It Show?

The first FIN report covered the first nine months of this new power, ending on 31 March 2022. During that period, HMRC issued about 350 FINs.

• International vs. Domestic: About 40% of these FINs were issued in response to requests from overseas tax offices, while the rest were used for HMRC’s own domestic investigations.
• Controversial Location Data: One surprising point in the report was that HMRC discussed whether it had overstepped by asking for taxpayers’ “location data” from banks—that is, the record of where a taxpayer was when accessing online or mobile banking. HMRC eventually decided not to use FINs to obtain this location data, at least for the time being.

The Second FIN Report: More FINs, More Questions

The second FIN report, covering a longer period (about 30% longer than the first), showed that the number of FINs almost doubled to 647.

• Fewer International Requests: Interestingly, the percentage of FINs requested for international assistance dropped to 20%.
• Increased Refusals: HMRC’s own authorising officers also refused more FIN applications—over one in eight were turned down.
• Location Data Again: The issue of location data came up once more. This time, HMRC noted that the Investigatory Powers Act 2016 has been updated. Now, HMRC does not need to rely on FINs to demand location data, as they have other legal routes available.

Latest Developments: New Partial Enquiries

Fast-forward to October 2024, when HMRC issued a new consultation titled “Tax Administration Framework Review—New Ways to Tackle Non-Compliance.” Among several new ideas, HMRC is now considering the introduction of “partial enquiries.”

• What Are Partial Enquiries? These are focused investigations into just one specific issue or section of a tax return. They differ from the long-standing “aspect enquiries” that also focus on parts of a return, but with one key twist: if a partial enquiry is closed, it gives some finality to that part of the return, meaning HMRC can’t reopen it later.
• Why It Matters: This is another example of HMRC trying to use its powers to find hidden taxes. They want to be able to have a “slice of cake” from every tax return—finding even small mistakes or missing amounts without having to go after the entire return all over again.

HMRC’s aim with these partial enquiries is to tighten the tax system and ensure that every taxpayer pays what they owe. However, these new tactics have raised concerns about fairness and privacy, with critics warning that HMRC’s increasing powers might lead to more invasive checks on taxpayers.

What Does This Mean for You?

If you’re a taxpayer, especially one who files a self-assessment return, you might wonder: “Should I be worried about all this extra data collection?” Here are a few key points to consider:

• Data Is Everywhere: HMRC already collects vast amounts of data through its Connect database, which can combine anonymous bulk reports to build a precise financial profile for each taxpayer—even including location data.
• Targeted vs. Bulk: While HMRC promises that individual taxpayers will only be targeted if something seems off, there’s always a risk that their systems might flag you by mistake.
• The Power of Machine Learning: HMRC now uses advanced machine learning to sift through the data. They can apply their “machine-learned IQ points” to decide who to target next. In plain language, this means HMRC uses smart computer programs to decide which taxpayers might owe extra tax.
• Stay Informed: Even if you are not doing anything wrong, it’s important to understand that HMRC’s powers are growing. Always keep your financial records in order, and be prepared to explain your transactions if HMRC ever contacts you.

The Balance Between Power and Fairness

The world of tax is complex, and HMRC’s new tactics show that the balance between catching tax evaders and protecting taxpayer privacy is delicate. On one hand, HMRC needs powerful tools to ensure that everyone pays their fair share of tax—especially as transactions move more and more into the digital world. On the other hand, these same powers can feel invasive if used without proper checks and balances.

HMRC has made promises in Parliament and built safeguards into its processes, but cases of “fishing expeditions” continue to surface in tribunals. Many taxpayers have complained that HMRC sometimes demands more information than is reasonable, using its powers under FA 2008, Schedule 36, to justify its actions. Despite these concerns, HMRC remains determined to expand its information-gathering capabilities.

Stay Alert and Be Prepared

The story of HMRC’s latest information powers is a clear reminder that the tax system is always evolving. Whether it’s through bulk data collection or targeted partial enquiries, HMRC is using every tool at its disposal to ensure tax compliance. For anyone who files a tax return, especially under the self-assessment system, it’s more important than ever to keep meticulous records and understand your rights.

The future of tax enforcement is here, and it’s powered by advanced technology and new legal tools. While HMRC’s methods may seem invasive, they are designed to create a fairer system where everyone pays what they owe. As a taxpayer, staying informed and prepared is your best defence against unexpected scrutiny.

So, the next time you hear about HMRC’s “fishing expeditions” or see headlines about new data powers, remember this story. Knowledge is power—and by understanding how HMRC operates, you can protect yourself from any surprises down the road. Stay smart, stay vigilant, and never stop asking questions about your tax affairs!