Spike in criminal prosecutions for tax evasion signal middle class professionals now in HMRC firing line, says expert

Out-Law News | 05 Aug 2013 | 1:55 pm | 2 min. read

A steep rise in the number of criminal prosecutions for tax evasion indicates that the financial affairs of middle class professionals are now subject to increasing scrutiny by HM Revenue & Customs (HMRC), an expert has said.

In 2012/13 there were 617 tax evasion prosecutions compared to just 302 the previous year, according to figures obtained from HMRC following a freedom of information request by Pinsent Masons, the law firm behind Out-Law.com. HMRC's target for successful prosecutions was 565 in 2012/13 and 365 in 2011/12.

"In the space of just one year, HMRC has massively ramped up the numbers of cases it takes to the criminal courts in order to clamp down on tax evasion," tax law specialist Jason Collins of Pinsent Masons said. "However, to hit that target and maximise the deterrent effect HMRC is now taking criminal cases against the kind of tax evaders it would have previously seen as small time. This means criminal cases against 'middle class' professionals and trades people who are evading what are relatively small sums of money."

"These aren’t necessarily individuals who owe hundreds of thousands of pounds but people like doctors, dentists, lawyers, construction contractors and restaurant owners who have not declared amounts in the tens of thousands. There is a definite pick up in investigatory action against white collar businesspeople. HMRC’s policy is clearly to use hard-line sanctions to help deter any wrong-doing," he said.

"Normally HMRC would have simply used civil recovery methods to claw in this evaded tax - now you can face a life changing criminal record and prison sentence," Collins added.

Collins said that HMRC has been given the staff resources to "make an example out of those it feels are cheating the taxpayer", after being provided with £1 billion in funds to tackle avoidance and evasion since the 2010 Spending Review. He said that in addition to lawyers, doctors and business or financial consultants being targeted, individuals investing in buy-to-let properties are also "falling foul of the system".

"Many people see buy-to-let as a substitute for a pension," Collins said. "It may produce similar financial results but they need to remember they can still incur significant tax liabilities. For new, part-time landlords who put their buy-to-let properties to the back of their mind to focus on their day job while the money rolls in, it can be quite easy to get caught out."

Professionals that have set up their own businesses after being made redundant as a result of the financial crisis "need to be very careful to get their tax affairs in order right from the start", Collins said. He said HMRC will take a "dim view" on white collar professionals who claim ignorance of their tax obligations. One common reason for prosecutions is that business owners sometimes fail to pay VAT once the company's turnover exceeds £79,000, he added.

Collins also warned that HMRC is set to ramp up its criminal prosecutions for tax evasion over the next few years. Its target number of prosecutions for 2014/15 is 1,165.

"HMRC will take each case on its merits, but it’s not just the worst offenders who are likely to face criminal proceedings," Collins said. "Even smaller-scale suspects are liable to feel the full force of the law, if the Revenue thinks it’s worth pursuing them."

"With outcomes so uncertain and cases frequently running into hundreds of thousands of pounds, it’s debateable whether pursuing the smaller claims through the criminal, rather than civil, courts, constitutes the best use of public money. However, HMRC may well feel that the deterrent value outweighs the risks involved. ”

Bringing a successful criminal case against individuals suspected of tax evasion requires HMRC to detail far more robust evidence before a court at a much higher cost than when it pursues a civil case.