Rise in tax fraud prosecutions shows HMRC's "aggressive approach" is having an impact, says expert

Out-Law News | 22 Apr 2013 | 2:15 pm | 3 min. read

The dramatic rise in the number of individuals prosecuted for tax fraud last year shows that the recent "aggressive approach" by HM Revenue and Customs (HMRC) is having an impact, an expert has said.

Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that the figures showed it was "more important than ever" that individuals and businesses were tax compliant.

Research by Pinsent Masons found a 53% rise in the number of prosecutions relating to tax fraud begun by HMRC last year; up from 157 in the tax year ending March 2011 to 240 in the tax year ending March 2012. The figures included direct tax fraud, VAT fraud and VAT missing trader intra-community (MITC) fraud. The research also showed slight increases both in the number of arrests made by HMRC and the number of individuals convicted of tax fraud.

HMRC investigates tax avoidance and evasion in the UK. Most cases are settled through negotiation with HMRC or pursued through the civil courts such as the Tax Tribunal, where taxpayers can be ordered to pay the unpaid tax with penalties and interest but do not face criminal sanctions. In the most serious cases of tax evasion HMRC provides evidence to the relevant prosecutor to make a decision on criminal charges.

HMRC was granted an additional £900 million to tackle tax avoidance and tax evasion as part of the 2010 Budget. Collins said that this money had been used both to increase the number of criminal investigations opened by HMRC and the speed with which cases were passed to prosecutors, such as the Crown Prosecution Service (CPS) in England and Wales. According to Pinsent Masons' research, the number of arrests for tax fraud has increased by 44% since tax year 2009/10.

"HMRC has adopted a very aggressive stance towards investigating individuals suspected of tax fraud," Collins said. "It is much more willing to opt for the criminal - as opposed to civil - investigative weapons in its arsenal. Arrests, prosecutions and property searched have all leapt since 2010."

"It has become more important than ever before that individuals and businesses are tax compliant. Any attempts to deceive HMRC, or even serious compliance errors, are now much more likely to be picked up on and end up in the courts," he said.

However, Collins questioned the effectiveness of HMRC's emphasis on criminal investigations activity rather than civil procedures to bring in potentially missing taxes. In addition, there were doubts about the CPS' ability to deal with an increased tax fraud case workload, he said.

"Civil procedures and amnesties can be a very cost effective way to boost tax yields," he said. "The Liechtenstein Disclosure Facility (LDF) is an effective 'amnesty' for dealing with tax evasion, but other options are limited, especially for individuals wanting to come clean with HMRC over legacy tax avoidance issues, particularly as some bought tax schemes when the climate for these things was very different."

"HMRC has relied on the Contractual Disclosure Facility (CDF) to allow people to settle tax avoidance-related debts, but this route has several drawbacks for taxpayers. Similarly, HMRC announced a partial amnesty for those using avoidance schemes before Christmas, but the proposals need plenty of clarifications - and, in all honesty, to provide more of a 'deal' on legacy planning if there is going to be strong take-up."

The CDF allows businesses and individuals to 'own up' to HMRC about any tax fraud they have been involved in. It is available voluntarily, and to those who have received a letter and form from HMRC stating that they are suspected of committing tax fraud. The LDF enables taxpayers with UK tax irregularities connected to a bank account, investment or structure in Liechtenstein to settle their tax affairs on favourable terms.

Collins said that although HMRC had benefited from extra funding from the Government to deal with tax fraud, the CPS had not. The increase in cases referred for prosecution could therefore lead to a "bottleneck" at the CPS, he said.

"Despite the CPS' intention to increase their tax fraud conviction rate, they have told us they will be relying on existing budgets to do so," he said. "The danger here is that a bottleneck may emerge if cases go through HMRC processes swiftly, but the CPS is unable to keep up. Both HMRC and defendants could be left in limbo waiting for the CPS to work through what could become a huge backlog."