Last month, former Formula One boss Bernie Ecclestone was given a suspended prison sentence after pleading guilty to a charge of fraud by false representation, following an ongoing HMRC investigation.
Ecclestone's guilty plea relates to a false representation made to HMRC that he was not the settlor or beneficiary of any trusts outside of the UK, except a single trust established and declared in favour of his children.
The remarks made by the sentencing judge refer to Ecclestone being linked to two trusts outside the UK and a Singaporean bank account containing "very substantial" funds.
HMRC is not alleging that the trusts themselves are problematic from a tax perspective – their complaint is that they were not told about them.
In this article, we look at the tax investigation tools HMRC used in this case, and the trend in increasingly vigorous use of HMRC's enforcement powers.
COP9 investigation
Initially, this case started as an HMRC Code of Practice 8 (COP8) investigation, which is used in circumstances where HMRC had no reason to suspect fraud.
However, the information disclosed as part of that investigation led HMRC to open a COP9 investigation, which applies where HMRC suspect that the person under investigation has been involved in tax fraud. COP9 is one of the more invasive tools in HMRC's kit.
It is a civil process under which a tax payer is required to lay bare their tax affairs, often stretching back over a considerable period. It is used for HMRC's more serious investigations, and while it is not a criminal process, it can only be used in cases of suspected tax fraud.
HMRC's guidance describes tax fraud as "any deliberate dishonest behaviour in respect of an individual's liability to pay tax, duties or levies".
This case signals HMRC flexing its muscles and using its full suite of powers, civil as well as criminal.Under COP9, the taxpayer and HMRC will enter a contract in which the taxpayer commits to make a "complete, accurate, open and honest disclosure" of all "deliberate behaviour" and all other irregularities in their tax affairs.
In return HMRC commits not to open a criminal investigation. The policy intention is to encourage taxpayers under COP9 to engage constructively with HMRC to regularise their tax position.
This benefits both parties: HMRC saves the cost of a full investigation, and the taxpayer pays outstanding tax, penalties and interest but draws a line under the matter, without more serious consequences.
However, failure to engage fully and honestly with the process risks HMRC opening a criminal investigation, which could result in prosecution, as it did for Ecclestone.
The COP9 process can be lengthy and expensive for a taxpayer. Ecclestone's motivation was described by the sentencing judge as a desire to save the costs of the investigation he was incurring, and bring it to an end.
Criminal proceedings: fraud by false representation
When HMRC considers that a taxpayer has not complied with the COP9 process, a criminal investigation can be opened.
This might be because there has been incomplete disclosure or the disclosure of false documents; or that false statements have been made in the COP9 process. In the Ecclestone case, the criminal investigation was initiated on the ground of fraud by false representation.
False representation requires dishonesty, and is different from making a mistake or being negligent. In pleading guilty Ecclestone accepted that information he disclosed to HMRC was untrue or misleading. In this case, criminal proceedings were brought in addition to the civil settlement for unpaid tax, interest and penalties.
Current trends: HMRC's use of data and enforcement powers
This case signals HMRC flexing its muscles and using its full suite of powers, civil as well as criminal. It also shows a determined and committed approach by HMRC to pursuing outcomes, even in challenging circumstances – their investigation has lasted more than five years.
Here, the pursuit of a criminal prosecution – not for tax evasion, but for a manipulation of the COP9 process – demonstrates a particularly strident approach by HMRC.
Notwithstanding the record £653mn civil settlement with Ecclestone (comprising interest and penalties), criminal proceedings were brought and a significant suspended 17-month sentence imposed. HMRC will want this case to have a deterrent effect.
This is in line with HMRC's recently toughened approach, which saw possible penalties increased and introduced new strict liability offences for offshore tax evasion.
The charges against Ecclestone are a reminder that HMRC and other prosecuting authorities are becoming increasingly aggressive in their pursuit of individuals and corporates where wrongdoing is suspected.
This case shows a determined and committed approach by HMRC to pursuing outcomes, even in challenging circumstances.The use of data is emerging as a key strategy. Tax authorities are gathering and exchanging more information about offshore accounts held by individuals, which enables them to use data analytics to identify more cases of tax evasion.
As a result of the economic downturn, more pressure is building on government to limit losses to public funds – including tax revenues.
It is worth noting that further prosecutorial tools to tackle tax evasion feature in the new failure to prevent fraud offence, part of the Economic Crime and Transparency Act, which received Royal assent on October 26 2023.
The new law makes it a criminal offence for a company to fail to have in place reasonable procedures to prevent fraud, which includes cheating the public revenue.
This means greater opportunities for enforcement authorities to focus on the investigation and prosecution of tax-related crime.
Ruby Hamid and Nicholas Gardner are partners at law firm Ashurst
