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Avoiding HMRC investigation – How does the Revenue assess risk?

The number of HMRC investigations into tax returns is on the rise with over 100,000 investigations undertaken during the first quarter of 2021.

As digital technology and data science develop HMRC are able to better focus their resources on those individuals who are more likely to be defrauding the exchequer. This has led to recent increases in the number of investigations launched by HMRC into tax returns.

How investigations are triggered

While some investigations are triggered through ‘tipping off’ by members of the public, the vast majority (over 90%) of investigations are launched through HMRC’s sophisticated data matching and risking tool named ‘Connect’, designed to process and analyse large volumes of data.

The ‘Connect’ system uses many analytical tools and methods to predict trends and behaviour patterns of a taxpayer. Data is collected from multiple sources which include (but are not limited to) the following:

  • Land Registry
  • Local government
  • The Border Agency
  • DVLA
  • Companies House
  • Council Tax
  • Business Rates
  • PAYE
  • Corporation tax
  • VAT
  • CIS returns
  • Import and export records
  • Private sector financial information from credit card issuers and companies such as eBay, PayPal, and Airbnb.

The ‘Connect’ system has a vast reach. All credit and debit card payments to UK businesses via payment processing companies can be reviewed to ascertain the value of transactions completed by a specific trader. This information is then used to compare card sales made by a busines each month with the taxes paid.

Any inconsistencies between reported figures and actual activity may be queried through an investigation.

The system can also indicate to HMRC where more in-depth investigations might be required for example identifying ‘hidden’ relationships between people, organisations and data that are not immediately obvious.

Using the ‘Connect’ system HMRC can automatically:

  • Obtain third party information from 16 business categories including employers, banks, insurance companies, financial institutions, brokers, auctioneers, estate agents and charities
  • Review employment records, which can also assist in profiling a business as well as identify those operating by using persons who may be termed ‘self employed’ but who may really be employed
  • Connect taxpayers to companies / entities
  • Connect bank accounts
  • Collate social media information
  • Compare taxpayer / business profiles to identify those that are similar

Patterns in behaviour

Most importantly the ‘Connect’ system can identify patterns in taxpayer behaviour, cross matching return data with information already held by HMRC.

These data patterns can then be analysed to identify anomalies between bank interest, property income and other lifestyle factors.

Local activity can also be analysed, looking at business sectors at a geographic level, comparing similar businesses within sectors in the same region. Cases identified for inquiry are then passed onto the appropriate local office.

Types of investigation

The most common form of enquiry centres around entries made on an individuals tax return.

HMRC have 12 months from the submission of a tax return to open an enquiry, unless the return was submitted late in which case different rules apply.

As part of the investigation HMRC will request information and documents to enable it to check on individual parts of the submitted return.

They then cross reference this information with information already held elsewhere on HMRC’s system to ensure the return is complete.

In more serious cases, HMRC’s Fraud Investigations Service may open a Code of Practice (COP) 8 or 9 investigation.

COP9 investigations are used where fraud or deliberate errors are suspected whereas COP8 tends to be used for cases where fraud is not suspected but may involve a technical issue (e.g. whether a source of income is taxable in the UK or not).


As HMRC ramp up compliance investigations and increase the sophistication of the ‘Connect’ system, it will be harder for tax evaders to hide from the taxman.

The best approach as usual is to ensure submission of full, complete and accurate returns to avoid the risk of an compliance investigation being raised on you or your business.


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