We have known since 2010 that HMRC has a computer programme, called “Connect”, that is collecting data from a variety of sources about taxpayers, and then using this intelligence to check on correct tax compliance. We have known that these data sources include Banks, Social Media, DVLA, Local Authorities, Foreign Tax Jurisdictions and Land Registry. We have now discovered from a recent client VAT inspection that another data source is transaction information from credit card processing companies. In this particular situation HMRC have compared credit card receipt totals with their list of VAT registered businesses. Where there is a business banking over the VAT threshold (currently £85,000) in a year which is not VAT registered, this is then flagged as requiring further inspection.
Legitimately non VAT registered clients, with significant exempt income, should beware of this potential challenge, as this important aspect of their business will not necessarily be apparent to HMRC. Protecting your position by taking out tax investigation insurance, to cover professional fees in defending your position, is a sensible risk management step.