RegulationJan 30 2013

HMRC gets tough with tax evaders

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HM Revenue & Customs investigates tax avoidance, which is legal, and tax evasion, which is illegal. Most cases are pursued using HMRC’s civil powers. In cases of suspected fraud, taxpayers are given the opportunity to participate in the contractual disclosure facility. Providing a taxpayer agrees to the terms of the disclosure facility and makes a full confession of all tax frauds, and any other irregularities, he will not be prosecuted for the frauds.

Where necessary cases are pursued through the civil courts, such as the Tax Tribunal. If the court finds in favour of HMRC, taxpayers can be ordered to pay the unpaid tax with interest and, potentially, penalties but do not face criminal sanctions.

Figures from HMRC suggest that tax evaders, including those operating in the hidden economy and those who undertake organised criminal attacks on the tax system, deprive the public purse of around £14bn. Although the figure cannot, by definition, be regarded as the definitive figure, the cost to the UK economy is substantial. Mr Starmer was keen to dispel the idea of tax evasion as a victimless crime, stating that tax ‘cheats’ cost each household the equivalent of £530 a year.

In the most serious cases of tax evasion, HMRC will commence a criminal investigation. The cases are selected in accordance with HMRC’s criminal investigation policy. As HMRC is not a prosecuting authority, it provides the evidence for the CPS to make a decision on criminal charges in England and Wales. In Scotland and Northern Ireland this is done through the Crown Office and Procurator Fiscal Service and the Public Prosecution Service Northern Ireland. The CPS has been responsible for prosecuting tax cases since 2010. Prior to that date the Revenue and Customs Prosecution Office was the prosecuting authority. The CPS secured 200 convictions in tax cases in 2010/2011, but this increased to more than 400 in 2011/2012. It has a conviction rate of about 86 per cent.

The CPS announced that HMRC will refer sufficient cases to enable prosecutions for non-organised tax fraud to rise from:

• 165 individuals in 2010/2011.

• 565 individuals in 2012/2013).

• 1165 individuals in 2014/2015.

These figures represent a significant increase in the risk for taxpayers suspected of fraud, and will make it more likely that they will be subject to criminal sanction. In addition to the above individuals, the CPS will continue to prosecute organised tax fraud.

The HMRC’s criminal investigation policy is to reserve criminal investigation for cases where it needs to send a deterrent message, or where it considers that the conduct involved is such that only a criminal sanction is appropriate. HMRC reserves discretion to conduct a criminal investigation in any case, and to investigate across a range of offences, in all areas for which HMRC has responsibility.

When HMRC considers whether a case should be investigated using civil or criminal powers, one factor taken into account is whether the taxpayer has made a complete and unprompted disclosure of the offences committed. The amount of tax lost, or potential tax lost, is not mentioned in HMRC’s criminal investigation policy, and this reflects HMRC’s desire to investigate across a broad range of offences to achieve the deterrent effect.

Whether HMRC will formally change its criminal investigation policy is not known at this stage. What is certain is that HMRC needs to drastically increase the number of cases it selects for criminal investigation to ensure that sufficient cases are passed to the CPS. In practice this will mean that more taxpayers who fall into HMRC’s criminal investigation policy will be subject to a criminal, rather than a civil, investigation. Whereas those taxpayers currently benefit from the contractual disclosure facility, in the future more will be selected for criminal investigation.

The additional criminal investigations will require a significant increase in resources for HMRC, as those cases are more labour-intensive than ones worked under the civil code. Resources are also being increased for HMRC’s civil investigation work. HMRC is recruiting an additional 100 tax inspectors to its affluent unit, which scrutinises the tax affairs of about 300,000 people with incomes of more than £150,000 or wealth between £2.5m and £20m. This £2.5m threshold will be reduced to £1m when the new inspectors are recruited in April.

Individuals within those categories of taxpayer where HMRC has introduced special arrangements for dealing with unpaid tax – for example, lawyers, doctors, tradesmen and so on – will continue to be at more significant risk

The CPS announcement targeted dishonest tax-avoidance schemes. These are schemes where HMRC could take the view that that taxpayer has tried to evade tax. The blurring of the line by HMRC between evasion (illegal) and avoidance (legal) has increased in recent years. HMRC already has a number of individuals under criminal investigation for suspected tax evasion stemming from participation in avoidance schemes.

HMRC generally expect taxpayers who have engaged in a tax avoidance scheme to obtain detailed advice from an experienced professional. Even if HMRC does not consider that the scheme was illegal, it may nevertheless seek substantial penalties on any tax due. If the scheme involves offshore jurisdictions, the penalties could be as high as 200 per cent of the tax.

The CPS is giving a clear message: taxpayers with undeclared income or gains should approach HMRC before the inspector comes after them.

Taxpayers with irregularities currently have one option of guaranteeing immunity from prosecution for tax offences. The Liechtenstein disclosure facility was introduced in August 2009. Primarily intended for taxpayers with ‘hidden’ assets in Liechtenstein, the procedure is also available to taxpayers without an existing connection to that jurisdiction. The facility offers various benefits, depending on the taxpayer’s circumstances. A key benefit available to every taxpayer who qualifies for the facility is immunity from prosecution for tax offences. Immunity will apply unless the taxpayer is involved in wider criminality, such as bribery or perjury.

Taxpayers can voluntarily approach HMRC for immunity from criminal investigation under the contractual disclosure facility. HMRC does not guarantee that it will grant such a request, and taxpayers would particularly be at risk of not being offered the contractual disclosure facility where, for example, they were in a position of trust or responsibility, or had committed previous offences. The Liechtenstein disclosure facility does not provide any such restrictions.

For those individuals who have undisclosed tax liabilities, time is running out in more ways than one. HMRC now has extensive information sources. It has been very successful in gaining access to data on Swiss and other banks, so may already have numerous individuals in their sights. And, importantly, the Liechtenstein disclosure facility is due to end on 5 April 2016, with the result that HMRC will be able to apply the full range of sanctions that are significantly reduced under that process. But taxpayers cannot sit and wait until 2016 before taking action.

Key to being able to use the Liechtenstein disclosure facility is to register for that process before HMRC approaches the taxpayer. Taxpayers who have been arrested, or have been contacted under the contractual disclosure facility, will not be allowed to use the Liechtenstein disclosure facility.

The process of establishing the necessary connection with Liechtenstein (if the taxpayer does not have one) is straightforward. Taxpayers with irregularities, particularly significant ones, should take action. And do so now, before it is too late.

Phil Berwick and Ray McCann are Partners (non-lawyers) at Pinsent Masons

HMRC’s policy provides examples of circumstances in which it will generally consider commencing a criminal investigation. These include:

• Where the individual holds a position of trust or responsibility.

• Where materially false statements are made, or materially false documents are provided, in the course of a civil investigation.

• Where deliberate concealment, deception, conspiracy or corruption is suspected.

• Where, pursuing an avoidance scheme, reliance is placed on a false or altered document or such reliance or material facts are misrepresented to enhance the credibility of a scheme.

• In cases involving money laundering, with particular focus on advisers, accountants, solicitors and others acting in a ‘professional’ capacity who provide the means to put tainted money out of the reach of law enforcement.

• Where the perpetrator has committed previous offences, or a repeated course of unlawful conduct, or previous civil action.

key points

The Crown Prosecution Service will substantially increase the number of tax cases it takes on.

Figures suggest that tax evaders deprive the public purse of around £14bn.

Time is running out for individuals who have undisclosed tax liabilities.