Neil Da Costa explains how HMRC is using AI to help it track those who evade tax. Could that be you?
The recent surge in artificial intelligence capability has led to HMRC becoming increasingly sophisticated in investigating tax dodgers. Here we will explore 10 red flags HMRC look for when investigating possible tax evasion.
Red flag 1
Most people love posting their holiday photos on social media. Through their Connect software, which is now 15 years old, HMRC is able to analyze your Instagram and compare that to your reported income. So, if you love imitating the influencers and your holiday photos show you on a yacht in the Caribbean, flying business class to Dubai or relaxing in a luxury villa in Santorini, this immediately casts doubt on your actual income reported.
Red flag 2
The taxman is now able to analyze listings and rental placements on Rightmove, Zoopla and Airbnb and compare that to information from the Land Registry. They can then check if the rental income from that specific property has been disclosed in your tax return. If not, expect an imminent tax enquiry.
Red flag 3
Since June 2021, the taxman has the power to issue a Financial Institution Notice that requires an individual to provide information on bank accounts and investments. If they find large unexplained cash deposits in your bank accounts this creates a red flag.
Red flag 4
The recent introduction of VAT on private school fees has led to the average day student annual cost spiraling to £20,000 per child.
Many families might have more than one child in private education so HMRC has been known to scour school registrations to check if the disclosed family income corresponds to the school fees paid. So, if your children go to private school this raises an immediate red flag with the tax man.
Red flag 5
Many people who have an online side hustle on Etsy, eBay, Gumtree or Vinted may not realize that, since January 2024, digital platforms are obligated to disclose details of sellers with earnings of at least £1,700 or those with 30 transactions in a tax year. If you are reported to be carrying out these online sales it immediately raises a red flag that you are carrying out a trading activity, leading to a potential income tax liability.
Red flag 6
HMRC uses AI to analyse dividend payments as well as stock and crypto transactions to determine if this correlates to income and capital gains disclosed in the tax returns. So, if you have been trading on Freetrade, Trading 212 or eToro this raises a red flag in relation to your tax affairs.
Red flag 7
In 2014, almost all members of the Organization Of Economic Cooperation and Development (OECD) entered into the Common Reporting Standard (CRS) to share financial information.
This includes countries such as South Africa, India, China and the UK. Many people are unaware that tax havens such as Panama, Cayman Islands or the United Arab Emirates are all part of the CRS. If you have stashed away a slush fund in Brazil to tide you over in the event of a future divorce then HMRC may know all about it.
Red flag 8
The taxman is now using digital tools such as Google Street View to check for expensive cars or major renovations, which may indicate undisclosed funds which have not been taxed. If you have a brand new Range Rover parked in your drive or have converted your three-bed semi into a five-bedroomed mansion you can expect the tax man to come knocking on your door.
Red flag 9
HMRC carefully analyses data leaks such as the well-known Panama Papers to launch investigations in possible tax evasion. In 2010, a disgruntled former employee of HSBC revealed that more than 8,000 UK residents had bank accounts in Switzerland. The taxman was able to raise more than £100 million in unpaid tax.
So, if like James Bond you have a secret deposit box in Monte Carlo and an employee becomes a whistleblower, you could be facing steep penalties for non-disclosure.
Red flag 10
The tax authority pays fees to informants who report tax cheats and encourages customers to report tradespeople who offer a discount for cash payment so they can keep the transaction off their books. HMRC has revealed that they have paid out £850,000 in 2024/25 to snitches. They now plan to move to a US Internal Revenue Service System which offers a percentage of up to 30% of the tax collected to the informant. So, if you have requested a cash payment for your services this raises a potential red flag and invites scrutiny.
This approach, which treats everyone as a suspect by default, has been criticized as a breach of an individual’s right to privacy.
However, with the UK government facing a black hole in their finances of at least £20 billion it seems likely that the taxman will continue snooping and analyzing data from multiple sources to build digital profiles of taxpayers.
- Neil Da Costa is a tax lecturer, author, tax consultant and podcaster
