Landlords are a recent target for HMRC – in January the latest target was taxpayers who have failed to pay capital gains tax on the sale of second homes & Taxpayers will have until 9th August 2013 to disclose to HMRC details of unpaid capital gains tax on the sale of second homes and up to 6th September 2013 to settle the unpaid tax. HMRC will charge a lower penalty to taxpayers who come forward voluntarily. There may be some taxpayers who may not be aware that they owe tax because they do not know the rules. In particular:-

•The taxpayer(s) may have gifted their second property to a relative (i.e. son or daughter). In this circumstance, capital gains tax could be payable with the open market value of the property at the time of the transfer forming the sales proceeds in the transaction;

•The taxpayer(s) may have lived in the property before moving to a new home. Instead of selling the property, the taxpayer(s) rent out the property to tenants. The Principal Private Residence Relief will not apply to the property when the taxpayer(s) move to their new home so some capital gains tax, relating to the period of non-residence, could be due.

How does the Taxman identify Property Tax Evasion?

•CENSUS – The 2011 census revealed a large number of UK citizens who own a second home including homes abroad;
•BANKS – Now have to provide more information to HMRC;
•PROPERTY WEBSITES – Can give readers an indication of the capital uplift in the value of the house since the last transaction;
•OTHER WEBSITES – Sites such [url=http://www.192.com]Search for People, Businesses and Places – 192.com[/url] contain information from Land Registry showing the value of the last transaction on the property;
•CREDIT AGENCIES – Are required to give details of loans and mortgages linking them to names and addresses;
•DATABASES – HMRC can search databases such as the Northgate Public Services System which shows details of housing benefits paid to landlords by any UK Council;
•LAND REGISTRY – HMRC can ascertain who owns any particular property and details of any sale proceeds;
•ELECTORAL REGISTER – Can ascertain who lives at a particular property;
•PURCHASE DOCUMENTS – These documents should now disclose the National Insurance and Ultimate Tax Reference for individuals and/or VAT numbers for companies and partnerships.

Connect Computer System

HMRC will then use their Connect Computer System to draw all this information together so that they can correctly target taxpayers. It is understood that HMRC have ALREADY used all of this available data to check over 10m property transactions.

When Mike Wells touches a button on his keyboard, a tangle of tiny lines bursts on to his computer screen. Within seconds, it weaves an elongated spider’s web connecting small graphic symbols representing people, addresses, phone numbers, bank accounts and employers.

When he clicks on an icon, another maze of connections ripples across the screen. At a glance, a skilled investigator can detect a pattern of concealment. Wells, director of risk and intelligences services at HM Revenue & Customs, says: “Over time you get familiar with a normal person’s spidergram. When someone is operating in a hidden economy it has a different shape.”
This is the tax authority’s “breakthrough” computer system, a new, powerful weapon against the fraud, evasion and avoidance that costs the Exchequer billions of pounds every year. The system – known prosaically as Connect – was designed by defence contractor BAE Systems and launched in the summer of 2010. It cost HMRC £45m, but even by 2011 it had delivered £1.4bn of additional revenues, according to the National Audit Office. Wells says: “Its power is making it so much harder to hide from us.”

Six out of ten inquiries now make use of the system, with investigators working “hand in hand” with 3,000 Connect analysts in offices up and down the country. It uses a mathematical technique known as social network analysis that ploughs through disparate, previously unrelated information to detect otherwise invisible networks of relationships. It automates analysis that would once have taken months, if it could have been done at all. “If a human being tried to plough through 26 databases, they just couldn’t do it,” says Wells.

Connect is an appropriate name. HMRC has a unrivalled wealth of information about people living in Britain, due in part to its many connections with other databases, such as the Land Registry, Companies House and the electoral roll. “We have more data than the British Library,” says Wells, adding that the HMRC website is one of the world’s biggest websites at peak filing time.

Access to such comprehensive data does not just allow investigators to spot anomalies. It also makes it much easier for HMRC to check up on individuals’ tax returns. Take inheritance tax, where HMRC receives about 300,000 paper returns every year. Around 200,000 of those come from estates claiming to be below the taxpaying threshold.

Using Connect, HMRC can sift through information on property transactions, company ownerships, loans, bank accounts, employment history and self-assessment records to spot where estates might be under-declaring. In its first year it raised an extra £26m in inheritance tax.

Informers

Disgruntled Tenants paying cash are the Taxman’s best friend. City law firm Reynolds Porter Chamberlain (RPC) says HMRC paid out 21 per cent more to informers in the tax year to April 2012 than the £309,620 in the previous year. “HMRC is under intense pressure from the Treasury to increase the tax yield for the Exchequer and it is increasingly resorting to unorthodox methods to get the job done,” says Adam Craggs, tax partner at RPC. “Other informers include those reporting someone bragging in the pub or doing a lot of jobs cash-in-hand.”. Rewards vary from a few hundreds to tens of thousands of pounds, but are paid only once tax has been recovered – and payments are not a fixed percentage of the tax recouped.

Third Party And Online Information

HMRC has recently beefed up its powers to demand “bulk” information from businesses or government agencies. In 2008 it homed in on the medical profession, acquiring information from National Health Service trusts, private hospitals and medical insurance companies to test its suspicions that practitioners were failing to declare fees for consultations, medical examinations and other services. Plumbers and heating engineers have also been targeted, after HMRC obtained information from the Gas Safe register. This trawl resulted in five arrests. The tax authority’s access to Land Registry and DVLA data means it knows how much someone has spent on their house and can see vehicles registered to each address. If someone has bought a Ferrari but is living in a modest flat, that might not fit with that individual’s financial affairs according to the Revenue. Or if someone owned three properties in their name but had not declared any rental income, that would also be a warning sign.

Social Networking sites, such as Facebook or Twitter provide evidence of a lifestyle that’s out of kilter with declared income. If the Revenue has doubts about someone’s tax affairs they will search for any information they can find on that individual, including posts on Facebook and tweets. Several individuals were caught out after appearing on the Channel 4 television programme My Big Fat Gypsy Wedding spending thousands of pounds of undeclared income on lavish family weddings. Another individual came under HMRC’s watchful gaze after posting photos of their luxury holidays on Facebook.

Higher-rate taxpayers with properties abroad are among those targeted by the 200-strong “affluence unit”, which is dedicated to checking that those who pay the 50 per cent tax rate, but are worth less than £20m, are complying with tax law. The team uses “sophisticated data mining techniques” on publicly available information to identify individuals who own property abroad. It then uses risk assessment tools to highlight those who do not appear able to afford those properties legitimately as well as those who have not declared the correct income and gains from the property. The affluence unit has been set a target of raising an extra £560m over the next four years.

Further Reading:

http://www.ft.com/cms/s/0/0f98bbc0-2db6-11e2-9988-00144feabdc0.html#axzz2Nt9eXOZK

http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9542989/HMRC-recoups-26m-missing-inheritance-tax-using-complex-PC-systems.html