Out-Law Guide | 13 Apr 2021 | 8:53 am | 7 min. read
Wealthy individuals are among the groups of taxpayers that HM Revenue & Customs (HMRC) has dedicated resources to ensuring pay the tax due in the UK.
Wealthy individuals with tax disputes may find their matter being handled by a specialist unit within HMRC’s high risk wealthy programme. If evasion is suspected, HMRC's fraud investigation service is likely to be involved. Criminal powers are much more likely to be used to deter non-compliance by the wealthy in comparison with the position a decade ago.
HMRC's approach to taxpayer compliance and enforcement in relation to wealthy individuals is best understood in the context of its organisational structure. One core component of this is its 'customer segmentation' model, which groups taxpayers by reference to their tax 'footprint'.
Wealthy individuals sit predominantly within the department's wealthy and midsized business compliance directorate (WMBC) which is responsible for general compliance, including spotting and correcting mistakes. HMRC's definition of 'wealthy' for these purposes currently includes those 700,000 or so individuals with incomes above £200,000 or assets above £2 million in any of the past three years.
HMRC’s high risk wealthy programme (HRWP) was launched in spring 2018 to be an equivalent for wealthy individuals to the high risk corporates programme for large businesses and is designed to accelerate tax disputes in the most complex high value cases.
Cases are chosen for the programme if there is a significant amount of tax at risk and it is thought that compliance interventions by the HRWP will add value. This may be because progress has stalled or the relationship between HMRC and the taxpayer has broken down. The HRWP team can deal with only a small number of cases at any one time, so the disputes with the highest amounts at stake are those most likely to be selected. It is possible for a wealthy individual to request, when the tax at risk is great enough, that a dispute becomes part of the programme, but this is entirely a decision for HMRC.
When a dispute is selected, the taxpayer is likely to be invited with their adviser to a meeting with a senior HMRC official. This is the equivalent of the 'board to board' approach adopted for corporates under the high risk corporates programme. As well as resolving the disputes, another objective of the HRWP is to change taxpayer behaviour to reduce future risk.
The programme seeks to resolve disputes with a collaborative approach, so the taxpayer will be expected to sign up to a project plan which will involve a rigorous investigation by HMRC. The case team will involve staff across the different sections of HMRC; it will have a senior case manager and there will be a point of contact for the taxpayer and their adviser. The aim of the programme is to resolve disputes with a settlement, but this will be in accordance with HMRC's litigation and settlement strategy (LSS).
If a dispute is brought within the HRWP this is a serious matter for the taxpayer, who certainly needs to be represented by a tax adviser with considerable experience of dealing with HMRC disputes. However, it can also be an opportunity for the taxpayer to have their dispute considered at a senior level within HMRC and it is likely to lead to the dispute proceeding relatively quickly. The programme should mean engagement of senior HMRC technical specialists and the involvement of new HMRC personnel could help to remove logjams that may have arisen as a result of HMRC or the taxpayer taking entrenched positions.
The HRWP will not be used in cases of suspected evasion. In that case HMRC's 4,500-strong fraud investigation service (FIS) is likely to be involved.
The FIS looks not just at segments but also at behaviours. The wealthy, like everyone else, exhibit the full range of behaviours from fully compliant, through to those who make innocent or careless errors, all the way to the minority who exhibit deliberate, and sometimes determined, non-compliant conduct. Within the FIS sits a specialist 500-strong offshore corporate and wealthy unit (OCW) whose purpose is to use criminal and civil powers to investigate suspicions of serious non-compliance by companies and some of the UK's wealthiest taxpayers.
Wealthy compliance teams in WMBC and OCW use different powers to address non-compliance, but they work collaboratively to understand what risk behaviour they believe they are seeing and to create 'risk treatment plans' to determine who should take responsibility for thematic as well as individual compliance challenges.
The close collaboration between the two units is shown by the fact that, in 2019-20, 15% of the 573 prosecutions brought by FIS were in respect of wealthy individuals. This close collaboration makes it critical that representations made during the course of civil settlements are fully accurate and transparent to avoid a criminal referral.
Much has been written about when HMRC will deploy criminal as opposed to civil powers. However, from an internal HMRC perspective, the governing principles are relatively simple. Factors which tend to point towards criminal action by HMRC include the most serious conduct, where civil powers are not working and where a deterrent is needed. An assessment of the severity of the taxpayer's conduct includes the amount of money involved or whether aggravating factors such as deliberate forgery or the use of offshore structures are used to disguise what HMRC considers to be the true position.
An indicator that civil powers are not working is when a taxpayer is found to be not telling the truth within a civil enquiry process such as a general enquiry or within the HRWP. In the current climate, HMRC may consider that a deterrent is warranted in relation to systematic abuses of coronavirus relief schemes.
A public example of the application of those three principles, and a clear example of the determination of FIS to ensure that its 'nobody beyond our reach' strapline has meaning, was the recent conviction of Dominic Chappell. Chappell was sentenced at Southwark Crown Court to six years in prison after being found guilty by a jury of evasion of corporation tax, income tax and VAT on £2.2m of income he received when his company, Retail Acquisitions Ltd, bought the high street chain BHS for £1 in 2015.
There are other examples too. HMRC is now much more likely to use criminal powers to deter wealthy non-compliance in comparison with the position a decade ago.
In 2009-10, FIS's predecessor, HMRC's criminal investigations directorate, at its height, prosecuted no more than 165 individuals each year, protecting the revenue from associated losses believed to be in the region of around £150m. Most of those cases related to organised crime such as carousel or missing trader intra-community (MTIC) frauds, or commodities smuggling — predominantly alcohol and tobacco. In terms of actions against wealthy taxpayers, very little criminal action was attempted.
As part of the 2010 spending review, HMRC was granted additional investigation resources underpinned by a pledge to deliver a five fold increase in prosecutions by the end of 2015. That was a tall order. However, during 2014-15 the criminal investigations directorate had indeed delivered 1,183 prosecutions, protecting around £300m in revenue.
Commentators were split between those who applauded the increase in visible enforcement activity and those who noted that the amount of revenue protected had not risen in line with the increase in headcount of those charged. This raised suspicions that HMRC had been pursuing 'low hanging fruit' and judging the wealthy with a different standard.
Perhaps stung by this criticism, HMRC applied for funding for additional resource and, as part of the UK chancellor’s summer budget in 2015, was granted funds that led to the creation of the fraud investigation service. This time its commitment was specifically directed at rebutting the previous criticism, and the funding was expressed to be for 'tripling the number of criminal investigations that HMRC can undertake into serious and complex tax crime, focusing particularly on wealthy individuals and corporates, with the aim of increasing prosecutions in this area to 100 a year by the end of the parliament'.
The FIS has taken the strategic decision to deliver fewer mass-market criminal interventions, but to focus rather on a far greater deterrent impact and much needed returns for the exchequer. By the end of 2020 it had well surpassed the goal of tripling the number of criminal investigations into wealthy non-compliance in delivering an eight fold increase in investigations in four years.
During 2019-20, the FIS charged 573 individuals with some form of tax fraud, but it also closed 21,000 civil files including 856 of their most serious code of practice 8 and 9 civil investigations. It also undertook 2,000 money laundering supervisory visits – issuing record fines, in one instance amounting to £23.8m for breaches of money laundering controls.
Although HMRC is unable to discuss publicly its open criminal casework, a recent freedom of information request revealed that 15% of those charged with tax offences in 2019-20 were from the 'wealthy' segment.
The result of this strategic focus on resourcing to risk, rather than chasing smaller and less impactful casework, is that the FIS protected or recovered more than £5bn in 2019-20. This is a huge jump compared with the £150m of just 10 years earlier and wealthy compliance is central to that strategy.
It is also important to remember that over that period, HMRC has gained access to huge amounts of information about assets held offshore through the common reporting standard, making it much more likely that it will find out about evasion. It also has enhanced powers including the strict liability offence of failing to notify HMRC of chargeability to tax, to file a return or to file an incorrect return in relation to offshore income, assets or activities, which makes it easier to prosecute those evading tax by holding assets offshore.
As the pressures on the exchequer mount, HMRC is likely to continue to ensure that wealthy taxpayers pay the right amount of tax at the right time and to drive home the message that wealthy individuals are not immune from being pursued if they do not pay tax due to the UK exchequer.
A version of this guide was published in Taxation on 24 March 2021.