As with all other areas, the overwhelming focus of the industry this year has related to the impact of COVID-19. In April 2020, HMRC announced that it would largely suspend tax avoidance investigations, partly to allow investigators to focus on managing the Coronavirus Job Retention Scheme (CJRS), and to deal with taxpayers who needed additional time to settle tax bills. As a result of the pandemic, income to the Exchequer has been hugely reduced due to a combination of unemployment, tax deferrals, and the absence of penalties resulting from investigations.
It is highly likely that the next year will therefore see HMRC significantly intensify focus on tax avoidance and evasion in order to close the huge gap in public finances. Furthermore, it is inevitable that HMRC’s criminal investigation teams will be required to address criminal activity that will no doubt flow from the CJRS itself.
HMRC’s opaque data on COP9 and criminal investigations
In December 2018, the House of Lords published a report into HMRC’s powers, titled “Treating Taxpayers Fairly”. In response, HMRC expressed a wish to focus on its commitment to increasing transparency and enhancing public trust by publishing more data and information about the exercise of its powers. In November 2019, HMRC published some data, including the number of closed civil and criminal compliance checks, total prosecutions and criminal sentences, as well as the outcomes of court decisions.
It is impossible to discern from the information whether HMRC’s powers are being used fairly. Basic figures are provided setting out the number of prosecutions, charging decisions, custodial sentences, closed criminal investigations, closed compliance checks, and wins and losses in the tribunal. However, much more detail is required. In particular, there is no analysis as to the nature of the convictions. It has long been suspected that the number of HMRC prosecutions has been inflated by the prosecution of cases that are both less serious and more easily proven. If this is the case, then this approach would be intrinsically unfair. HMRC operates a (published) selective criminal investigation policy, supposedly reserving criminal investigation “for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate”. COP9 is meant to be used for the other cases. There used thus to be a prosecution rather than a criminal investigation policy, which was meant to be selective so that not all cases of tax fraud were prosecuted, and the “criteria of selectivity” were said to be the “badges of heinousness”. This approach was upheld by the High Court in ex parte Mead and Cook  1 All E.R. 772. However, since Mead, it is apparent that the criteria of selectivity have been all but abandoned, such that the underlying conduct of those subject to COP9 is often far more serious than that of those criminally investigated.
HMRC publishes no analysis in relation to its use of COP9, the essence of which is that an individual is told he or she is suspected of fraud but not told anything about the nature of the fraud nor the grounds for suspicion. The individual is then invited to “own up” to their “deliberate conduct” within 60 days, in return for which HMRC will not pursue a criminal investigation into that conduct. If the individual makes a disclosure of fraudulent conduct, they cannot be criminally investigated in relation to that conduct. They are, however, vulnerable to criminal investigation in relation to tax irregularities – disclosed or otherwise – which they do not admit are deliberate. Whilst this is truly an invidious procedure, it is rarely challenged, as the alternative – criminal investigation with a view to prosecution – is much worse.
HMRC’s published figures do not indicate the amount of tax and penalties obtained via civil settlement under COP9/CDF, or indeed the proportion of COP9 investigations into suspected tax fraud or deliberate tax evasion that resulted in penalties for deliberate conduct. Many take the view that COP9 is being used inappropriately in order speculatively to seek evidence of suspected tax irregularities, without reasonable grounds for suspecting tax fraud.
HMRC has more recently indicated that it would increase the number of criminal investigations into serious and complex tax crime, focusing upon wealthy individuals and corporates. It remains to be seen whether their published data will reflect that intention.
Corporate criminal offence
In 2015 the BBC’s Panorama obtained a copy of a list of taxpayers’ names which had been stolen from HSBC Geneva and passed on to HMRC. The BBC alleged that the list showed that HSBC employees had been facilitating UK tax evasion. There was considerable public pressure for HSBC to face UK criminal charges. However, none has followed. As is well known, it is very difficult for prosecuting agencies successfully to prosecute corporates due to the “identification principle”, whereby for corporates to be guilty of any criminal offence, an individual representing the company’s “directing mind” must be guilty of a criminal offence. HSBC was not prosecuted, nor were any individual employees.
In the context of bribery, Parliament bypassed the identification principle by enacting section 7 of the Bribery Act 2010 which criminalises an organisation if it fails to prevent an associated person from bribing another person intending to obtain or retain business for the organisation. Whilst it is a defence for the organisation to prove it had in place adequate procedures designed to prevent the bribery, this is notoriously difficult to establish, as arguably the procedures could not have been adequate otherwise the bribery would not have taken place…
The Serious Fraud Office (SFO) has successfully negotiated a number of deferred prosecution agreements (DPAs) in relation to section 7 of the 2010 Act, but at the time of writing there has been no successfully contested case prosecuted by the SFO.
HMRC decided to lobby for the same jurisprudential model in respect of the facilitation of tax fraud, and Parliament duly enacted Part 3 of the Criminal Finances Act 2017, creating the new corporate criminal offences (CCOs) of failure to prevent the facilitation of tax evasion. In order to establish a defence, the corporate will have to prove on the balance of probabilities that it had “reasonable procedures” to prevent the facilitation, which may or may not be slightly easier to prove than “adequate procedures” under the Bribery Act 2010.
It is particularly significant that HMRC is for the first time targeting corporate defendants. While corporates have occasionally been prosecuted before by HMRC, there is little culture in HMRC of criminally investigating/prosecuting corporates. Whilst the SFO has developed guidelines, some apparently “borrowed” from those of the US Department of Justice, setting out how and when a corporate should be considered sufficiently co-operative to merit a DPA, as yet there have been no such guidelines from HMRC. And, at the time of writing, no prosecutions…
Following a number of freedom of information requests, in February 2020, HMRC for the first time released figures as to the number of CCO investigations (nine) and the further anticipated investigations (21). But with these figures, it can surely only be a matter of time before the Public Accounts Committee are on their back.
A new approach to “enablers”?
The pandemic has also prompted a significant development in relation to HMRC’s approach to “enablers” who devise and market ineffective tax avoidance schemes. The All-Party Parliamentary Group on Anti-Corruption and Responsible Tax called for new measures to curtail “aggressive tax avoidance” facilitated by “enablers”, and published a policy paper proposing what they (euphemistically) call a “streamlined” dishonesty test for criminal prosecutions of tax avoidance, and also a lower threshold for civil penalties. Under the new “threshold test”, the requirement for dishonesty would be removed, and an enabler of aggressive tax avoidance schemes would be guilty “where it would not be reasonable to consider that the scheme was a reasonable one” (the “double reasonableness test”).
In the paper, Dame Margaret Hodge stated: “It is absolutely the right time for us to be even tougher on aggressive tax avoidance… The enablers of failed tax avoidance schemes are breaking the law, plain and simple.” Dame Margaret (and she is not the first politician to do so) seems deliberately to blur the distinction between tax evasion (criminal and unlawful) and ineffective tax avoidance (ineffective for tax purposes, but not criminal). The paper argues that promoters of aggressive tax avoidance schemes have not been pursued in criminal investigations. However, HMRC has invested huge resources in criminally investigating promoters of aggressive schemes. Indeed, some believe that HMRC has intentionally caused even legitimate advisers to be in terrorem of being accused of promoting avoidance schemes.
To remove the requirement to prove dishonesty from the offence of tax fraud would be a huge step with far-reaching consequences: The idea that one can be guilty of tax fraud without being dishonest is fundamentally misconceived.