It was announced in June 2018 that the UK’s tax gap (i.e. the amount of tax that ought to be paid to HMRC in contrast to the amount recovered) was £33 billion. Significantly, and perhaps surprisingly, it was revealed that tax avoidance was the least significant contributor to the tax gap. Despite its high profile, particularly with the media and public, it appears that fraud, rather than avoidance, is responsible for the greatest loss to the Treasury.
HMRC have suggested that this is due to their successful targeting of the tax avoidance industry over the last few years. However, their apparent success has highlighted the fact that there are many more difficult targets, most notably the investigation and prosecution of high-profile cases of tax evasion. Indeed, in early 2018, the Public Accounts Committee indicated that HMRC was struggling to cope with the Panama and Paradise Paper data leaks, stating: “We are far from confident that HMRC has sufficient resources to deal with the full scale of the recent allegations.”
In addition, there may be perceived difficulties regarding the source of the material contained in both the Panama and Paradise Papers. A well-publicised example of HMRC coming into possession of material of dubious origin was of course the list of clients and related confidential banking data stolen by ex-HSBC employee Hervé Falciani in 2008, which was seized from him by the French authorities and then acquired by HMRC. The Public Accounts Committee (and the Daily Mail) lambasted HMRC for only prosecuting one individual named on the list. The real reason why more were not prosecuted of course may simply be over concerns regarding admissibility of illegally obtained material in a criminal trial; practitioners will be keen to point out similar issues with the latest batches of dubiously obtained documents. It is this concern over provenance that may have led to HMRC being more than slightly coy about the origins of these new lists.
As to numbers of prosecutions, in the 2015 budget, the Chancellor announced that HMRC would receive £800 million in funding, with a target of tripling the number of complex tax crime investigations, concentrating on wealthy individuals and companies, by the year 2020. However, it has long been the impression of many practitioners that as far as criminal investigations are concerned, HMRC have focused their attentions on less serious offences in order to inflate their prosecution statistics. It remains to be seen whether HMRC will continue with that controversial approach.
The reality is that complex criminal investigations and prosecutions are extremely expensive to pursue, and it stands to reason that in individual cases the net recovery to the Exchequer tends to be higher when complex tax fraud is investigated civilly rather than criminally. What is impossible to tell, however, is the value of the general deterrent effect of the successful prosecution of large-scale tax evasion cases.
The irony also is that when a high-profile client is acquitted, the effect, if anything, amounts to negative deterrence to the public at large. After all, headlines such as "Ken Dodd gets the last laugh as he beats tax man again" nearly thirty years after his famous acquittal hardly help the message. There have been other such headlines in relation to the acquittal of similarly high-profile individuals, examples of whom will not be mentioned in this overview as their names have already been traduced by the mere fact of their having been prosecuted.
HMRC hope that the deterrence message will be strengthened by the fact that, as from 30 September 2018, they will be receiving substantial amounts of information from over 100 countries under the Common Reporting Standard. At the same time, HMRC will begin to take action in relation to the new offence of offshore tax evasion found in Section 166 of the Finance Act 2016. The fact that taxpayers can now be imprisoned for six months for mere carelessness is a matter of huge contentiousness. Tax evasion is an offence of dishonesty, requiring the deliberate concealment of assets. As the Fraud Lawyers Association put it in their response to HMRC’s consultation paper, the new strict liability offence "is profoundly inconsistent with any offence of dishonesty, of which tax evasion is a prime example."
The likely increase in criminal investigations will of course require practitioners to scrutinise the procedural propriety of HMRC. For example, clients will expect tax fraud practitioners to be at the cutting edge and have substantial experience of challenging the lawfulness of warrants when the need arises.
In 2017 in Hart and Others v HMRC and others EWHC 3091 (Admin) the High Court emphasised that in seeking potential evidence, HMRC are required to use the least intrusive power available. In Hart, HMRC’s ex parte application for a search warrant stated that other means of obtaining the material sought would be unlikely to succeed, and that the suspects were attempting to "thwart" the investigation. However, HMRC failed to refer to a lengthy meeting in which the suspects had been willing to provide substantial information. It was held that there had been a breach of HMRC's crucial duty to make full and frank disclosure to the court when applying ex parte for a search warrant. The judge who granted the warrant had been denied information which he needed in order to decide whether less intrusive orders were more appropriate. The warrants were accordingly quashed and the searches declared unlawful.
The need to examine HMRC’s proper use of powers is also relevant in relation to the Code of Practice 9 (COP 9) procedure. The essence of COP 9 is that an individual is told he or she is suspected of fraud, but is not told anything about the nature of the fraud that is suspected or the grounds for suspicion. The individual is then invited to "own up" to his "deliberate conduct" within 60 days - in return for which HMRC will not pursue a criminal investigation into that conduct. This "opportunity" is known as the Contractual Disclosure Facility (CDF). If the individual makes a disclosure of fraudulent conduct, he cannot therefore be criminally investigated in relation to that conduct. He is however vulnerable to criminal investigation in relation to tax irregularities – disclosed or otherwise – which he does not admit to be deliberate.
A recent development which practitioners ought to be aware of, is the fact that HMRC have issued what they call a “clarification” in relation to CDF. They state that if a taxpayer requests CDF, and makes an outline disclosure admitting deliberate conduct bringing about a tax loss to HMRC, but subsequently asserts that his or her behaviour was not deliberate, but merely careless, then that subsequent account will be treated by HMRC as a repudiation of the CDF agreement. HMRC have stated that they reserve the right to commence a criminal investigation, and that any material disclosed to them prior to the “repudiation” may be used in evidence in any prosecution.
HMRC do not appear to recognise that when faced with the stark choice of admitting deliberate conduct or being criminally investigated, some taxpayers appear to take the pragmatic decision to enter into the facility without having acted dishonestly. For this reason (and others) the CDF is arguably unlawful as it appears that individuals are given an inducement to admit fraud in a procedure which would in practically any other context (e.g. in a police interview) be regarded as unlawful.
Nonetheless, for now, the procedure remains in place, and practitioners ought to be aware of the potential pitfalls involved in dealing with a process that can be distressing and confusing for clients. In this context, it is crucial that clients do not make statements that HMRC could allege to be false in responding to COP 9. In recent years, in the writers’ experience, it has been notable that the vast majority of cases that move from the civil track (for example COP 9 or an enquiry under s9A of TMA 1970) to the criminal track, are where statements have allegedly been made by the taxpayer during the course of a civil investigation, which are later alleged to be false by HMRC. Clients will expect their lawyers to be very aware of this potential danger.
Contributed by BCL Solicitors LLP