The Data Wake – A Blog by Paul Aplin OBE

Navigating the complexities of tax compliance is an intricate act in a world rich with data. Paul Aplin OBE, a renowned tax writer and Senior Advisor to Daysium, shares his insights into the significance of these data trails. Sit back and venture with us into a world where a simple card transaction has the potential to impact the course of a tax investigation.

In his book Apollo 13, US astronaut Jim Lovell shares the story of a night flight from an aircraft carrier. A shorted electrical circuit left every bulb on his instrument panel dead. There was no moon and clouds obscured the stars. Where was the ship? Lovell’s options were unenviable, but as his eyes adjusted to the dark, he saw a faint greenish glow in the sea below him. It was a trail of phosphorescent algae, made luminous by the carrier’s propellors. It rendered the ship’s wake visible in the darkness and guided him all the way back to the flight deck.

In the same way, in this data-driven world we now inhabit, most of us navigate by and leave behind us trails of data. Some of these trails are obvious, and we leave or follow them consciously, such as with social media; others we leave largely unconsciously, but either way, they reveal things about our whereabouts, interests and lifestyles that are of great interest to businesses we buy goods and services from and, on occasions, to tax authorities. The patterns and details hidden in the data can yield critical insights.

A tax official from one European country showed me how data drawn from sets of business accounts could be visualised using scatter-diagrams for specific figures across thousands of similar enterprises. He was not interested in the large blob of results in the centre of the screen but in the outliers: why were they so different? The figures might not stand out on their own, but in the context of a vast sea of results, they did so very clearly. They indicated the existence of a trail worth following: they were candidates for investigation.

Modern bookkeeping and accounting software can capture details from invoices, receipts and other documents and store vast amounts of information. A friend who specialises in data analytics recently showed me how he would look for things that might be of interest to a tax authority in a set of business records using data analytics software. “Let’s look for some private expenditure that has been put through the business,” he said, “say restaurant bills.” There were hundreds, all of which might perfectly reasonably have been claimed as business expenses, but just as I was thinking that, he narrowed the search to weekends and then ran a second search on hotel bills with matching dates and double occupancy. In two or three minutes, he had enough to justify asking some potentially embarrassing questions. He had found detailed information about personal behaviour, right down to what had been ordered on room service one hot summer night.

As individuals, we leave a data trail of where we were, when, where we shopped and even what we bought. In the context of tax residence, such data can be extremely valuable in proving that a taxpayer was or was not resident in a particular jurisdiction. In one UK case, the use of a bank card at a petrol station was taken as evidence of the cardholder’s location at that point in time. The tax consequences of being a resident or non-resident can be huge, and I have known situations where that question hung on being able to prove where the individual was on one particular day.

Personally, I don’t view this negatively: if you have nothing to hide, then data trails may just provide the evidence you need to prove your point. If you have something specific that you need to prove, then there is no substitute for robust evidence gathered and stored securely at the time of the event or transaction. You do, however, need to avoid inadvertently leaving false trails: think twice, for example, before lending a loyalty card or bank card to someone (and before you say, “no-one would do that”; trust me, it happens).

Data wakes and shrewd data analytics can catch out the unwary, but if understood and properly used, they can equally represent the route to safety.

The data you leave behind in today’s data-driven world can tell powerful stories. Your ability to navigate this data richness is critical, especially in the realm of tax residency. If you’d like to strengthen your tax compliance and generate robust, contemporaneous evidence to support your tax residency claims, join the Daysium waitlist now.