The future of HMRC prosecutions

Criminal investigators and legal advisers now sit within most departments within HMRC. The move is intentional given the expected rise in prosecutions. In a speech by Keir Starmer QC, Director of Public Prosecutions on 23 January 2013, the following was revealed:

“Against that background, you will, no doubt, be pleased to hear that the criminal justice response to tax evasion is being ramped up. There are three strands to this:

• First, a stronger fraud prosecution capability has been developed following the merger of the CPS with the Revenue and Customs Prosecutions Office.

• Second, in conjunction with HMRC, a strategic decision has been taken radically to increase the number of tax evasion cases prosecuted.

• Third, working together, HMRC and the CPS have now demonstrated that it is possible successfully to prosecute not only individuals, groups and organised criminals who evade tax or excise duty, but also those who set up sophisticated but dishonest tax avoidance schemes.

At the same time, senior judges have made it clear that, when it comes to large scale tax evasion, even those without previous convictions can expect significant custodial sentences.”

The fact that criminal investigators now sit within most HMRC compliance teams means that prosecutors are involved in cases at the beginning of an investigation. This means that there may only be suspicion when prosecutors get involved and they can help to identify offences and what evidence would be needed to prove a case. Have you ever wondered why HMRC are making a particular enquiry or requesting primary documents (evidence)?

We are not speculating that each case under enquiry will be one identified for criminal investigation, far from it. We are merely pointing out that each enquiry has the ability for internal guidance from both criminal investigators as well as prosecutors. This could have the benefit of a much more streamlined case and an efficient process of gathering evidence to prove a suspected tax irregularity or, if the irregularity/activity were severe enough to warrant criminal investigation.

HMRC’s selection policy for prosecution has also changed. The only cases that were heard about by the public at the start of my career were high profile ones. The policy being that prosecuting high profile cases had a media advantage to warn the wider public of the consequences. However, in July 2013 HMRC received a research report “Her Majesty’s Revenue and Customs (HMRC) Qualitative research with SMEs aware of prosecutions”. It is like someone at HMRC was given a subscription to the Harvard Business Review and consciously posed the question: do our customers relate to our prosecution policy?

The findings were that the public found out about prosecutions through word of mouth/gossip, local newspapers and national papers: “Overall, ‘local gossip’ was seen to play the strongest role in the spread of stories across a wider, looser network of acquaintances. Gossip had a particularly powerful hold in small towns, and local cases that caused a ‘scandal’ were discussed quite openly among a wide network.”

The elements people recalled in relation to a criminal investigation were:

• The prevention of trading during the investigation

• How invasive the investigation process was

• Reputational damage

• Professional credibility

• Career jeopardy

An interesting fact is that the review identified that people distinguished with the types of evader and circumstances:

• Clear-cut criminal examples

• Wealthy individuals motivated by greed

• Cash-in-hand trades where evasion was standard practice

• Examples of suffering businesses and smaller amounts

It is therefore not unsurprising that since this review, HMRC has prosecuted and publicised prosecutions locally and nationally. HMRC has not simply targeted high profile cases and instead it has increased prosecutions in areas where the public may more easily relate. Keir Starmer QC also set out in 2013 that “HMRC will refer sufficient cases to the CPS to enable prosecutions for non-organised tax fraud to rise from:

• 165 individuals in 2010/11, to

• 565 individuals this year (2012/13), to

• 1165 individuals in 2014/15.”

From April 2010 to March 2014 HMRC have prosecuted 2,650 individuals (including barristers, solicitors and accountants) resulting in a cumulative 2,700 years of custodial sentences. Our quick analysis indicates these figures exceed Keir Starmer’s predictions.

Examples where HMRC will generally consider commencing a criminal include:

• Individuals holding a position of trust or responsibility: solicitor, accountant or financial adviser

• Materially false statements are made: denial of offshore bank accounts etc.

• Materially false documents provided in the course of a civil investigation: accounts, invoices or forged legal documents

• In relation to an avoidance scheme, reliance is placed on false/altered document or material facts are misrepresented to enhance the credibility of a scheme

• Deliberate concealment, deception, conspiracy or corruption is suspected

• Importation or exportation breaching prohibitions and restrictions

• Money laundering in particular where professionals have assisted

• Where there is a previously committed offence

• Cases involving theft, misuse or destruction of documents

• Evidence of assault or threats to HMRC officials

• Organised criminal gangs attacking the tax system or systematic frauds where losses represents a serious threat to the tax base, including conspiracy

• Links to suspected wider criminality, whether domestic or international, involving offences not under the administration of HMRC

Many criminal investigations will arise where the suspect is ill advised. If care is taken at the outset of HMRC’s enquiries, the risk of prosecution can be managed. An adviser may consider the enquiries to be routine although it would always be prudent to seek a second opinion early on when HMRC raise an enquiry. There is also a potential direct risk where the taxpayer is represented by a professional who may in some way appear or actually be involved with or connected to the tax irregularity. At Edge Tax, we are happy to have a no obligation discussion with an adviser or client on their situation.

• Two New Criminal Offences: “Tax evaders and the professionals who enable tax evasion will face tough new sanctions, including two new criminal offences and higher penalties, under a new regime to crack down on offshore evaders the Chief Secretary to the Treasury Danny Alexander announced today (Thursday 19 March)”.

These are serious measures on top of existing measures that are destined to result in more revenue and more prosecutions. The pre-election news is currently all about the government overspend when compared to Revenue intake. This cannot be a mirage of efforts that won’t have an impact. For example the regulations to implement the UK’s automatic exchange of information agreements expects to yield results:

It is not all about the money though. The measures, which we have seen over the past few years, are deterrents to those trying to reduce their tax liability (although everyman used to have that right – IRC V Duke of Westminster 1936). Arguably everyman still has that right although the Revenue don’t seem to know what they consider right or wrong, what is tax mitigation, avoidance or evasion. This makes for a worrying situation given the two new criminal offences! Thankfully a last chance disclosure facility will be introduced!

The plan is:

• A new strict liability criminal offence for offshore evasion

• Criminal offence for failure to prevent or the facilitation of tax evasion

• Increase the financial penalties faced by evaders

• Introduce new civil penalties on those who enable evasion so they will face the same penalty as the tax evader

• Publicly name and shame both evaders and those who enable evasion

The new strict liability offence basically means that proving “intent” won’t be necessary: currently tax evasion is where someone intends to defraud the Revenue, whereas the new offence will remove the need to prove an intention (or demonstrate no intention).

The increased financial penalties proposed will also link the penalty to the value of assets kept in an offshore bank and not the tax due. This is a much nastier penalty!

Chief Secretary to the Treasury Danny Alexander said “I have made a great deal of progress in shutting down those loopholes and clamping down on aggressive avoidance and evasion.” It is good for Danny to take responsibility although we wonder if he is also to blame for the points we have raised before:

• HMRC have a duty to inform taxpayers what is acceptable or not in a timely manner. Why then are they now attacking tax planning that has been well established for a decade or more? Why didn’t they legislate a decade ago?

• HMRC (or Parliament) have a duty to clearly define acceptable tax planning, tax mitigation, tax avoidance and tax evasion. Despite the phenomenal amount of powers introduced, they have still failed this simple task. It appears that a number of Lords as well as my favourite ex Prime minster, Tony B all know what is acceptable.

Mr Inspector having arrived at the offices and locked up his bicycle will be pleased to know that Danny has also “authorised over £1 billion of investment in HMRC to ensure they have the tools to do their job.” Not sure what this is to be spent on although a few decent coffee machines for visitors would be nice. It is suspected that a good amount will be spent on continuing the growth and power of IT systems and fraud detection software (Connect) as opposed to employing more or creating a bonus pool.

Danny also announced “The Chief Secretary has also today called on the tax and accountancy professional regulatory bodies who police professional standards to maximise their role in setting and enforcing clear standards around enabling and promoting avoidance.” It is therefore highly likely that reputable firms following the conduct of their professional bodies will steer clear from aggressive tax planning.

The new regime will be subject to consultation and it is something we will certainly be involving ourselves in. If only to try and make sure that avoidance and evasion are clearly defined in respect of this regime. Given the history of the past few years, the regime will be close to what is proposed.

All those that have undertaken tax structuring, in particular offshore, should seek an independent view on whether they are at risk. In particular, advisers and those administering the structures should also consider their risks.

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