How to protect yourself and your company against tax fraud and prosecution.

HM Revenue and Customs (HMRC) is celebrating after a two-year investigation into the construction industry led to the uncovering of a £6.9M tax fraud. Following a six-week trial at Maidstone Crown Court, an accountant, a company director and a payroll administrator were unanimously convicted of conspiracy to cheat the public revenue.
The court had heard that a sophisticated international web of companies and bank accounts was used as millions of pounds were deducted from workers’ pay packets on construction sites but never passed on to HMRC.
This case is a notable one for a number of reasons. It has come to court four years after the HMRC started to take a particularly close look at various industry sectors; one of them being construction. We warned at the time that many in construction would need to examine their tax affairs.
It could be the first of many construction tax fraud cases coming to court, which would prove that our warnings were worth heeding. As a firm, we have recently been instructed on a number of tax fraud cases involving construction and other industries. But this case alone makes it worth emphasising the precautions you have to take against tax fraud.
Definitions
When it comes to the definition of tax fraud, it is always worth repeating the very important distinction between tax avoidance and tax evasion. Tax avoidance is the legitimate – and legal - use of the tax system to minimise the amount you have to pay. Tax evasion, however, is the illegal attempts to avoid paying the tax you owe.
Tax evasion can involve disguising the true financial position of a company, organisation or individual; usually through inaccurate reporting of profits or income. The penalties for evasion can be high: ranging from between 10% and 200% of the tax that HMRC says is payable as a result of their tax investigation.
Speaking as a firm that represents individuals, companies and organisations who face tax allegations, we can speak with authority when we say that the moment someone realises they are under investigation they have to accumulate all the relevant information, contact a specialist solicitor and then let their legal representative carry out the negotiations with the authorities. The right solicitor can collate all available evidence and make the best use of it. He or she can also exercise their detailed knowledge of tax arrangements here and abroad, employ their investigative skills and call on forensic accountants and other experts to build up a defence that challenges every aspect of the allegations being made. Not taking such legal advice, however, can be as costly as taking none at all.
Prevention
It almost doesn’t need saying but such legal expertise may not be necessary if you have already taken steps to prevent the likelihood of tax fraud being committed in your name or that of your organisation.
Recent years have seen tax evasion become a hot political issue, with the result that HMRC is especially keen to track down and prosecute tax fraud. If you do come under investigation, the simplest and clearest way of rebutting suspicions and allegations is to be able to present to investigators the records of your fully-documented accounting system.
What must be remembered, however, is that such an accounting system will only be a worthwhile challenge to allegations if it complies with all relevant aspects of the law. To make sure that is the case requires the assistance of a solicitor familiar with compliance issues. After all, there is no point putting in place what you believe to be a perfect accounting system if it is fatally flawed in the eyes of the law.
Internal Investigations
Such a problem highlights the need for a firm, individual or organisation to have their affairs examined by a legal expert before the authorities come looking. Hiring a legal firm to conduct an investigation into the way you work may not seem a welcome idea for a number of reasons. Some may consider it an invasion of privacy, an unwanted expense, an obstacle to day-to-day working and an unnecessary intrusion.
This would be a major mistake. Such investigations can be the crucial difference between you continuing to perpetrate tax fraud (either knowingly or ignorantly) and making sure that you are functioning effectively, efficiently and legally. Or to put it another way, the difference between you being the first to know you are running the risk of tax fraud and the authorities telling you they think you are guilty of tax fraud.
If an internal investigation does uncover wrongdoing, it gives you far greater scope for negotiation with the authorities than you would have if it was them, rather than you, who discovered the tax fraud.
The difference is a stark one. If the reluctance to commit time and effort to preventing or identifying tax fraud is down to expense it would be ironic bearing in mind just how costly a prosecution could turn out to be to your finances, reputation and ability to keep trading. That is the issue that the accountants and other financial advisors in any company have to remember at all times.
Taking steps to identify and prevent tax fraud now will reap benefits later.