TAX: An Introduction to UK-wide

Tax: Contentious: Fraud Overview 

Contributed by Harry Travers and Greg Mailer of BCL Solicitors LLP

As the country slowly returns to normality following the Covid-19 lockdowns, HMRC’s attention is finally beginning to shift away from managing emergency pandemic measures such as the Coronavirus Job Retention Scheme, and back to addressing tax avoidance and evasion.

Practitioners anticipate that the need for HMRC to close the tax gap will see a significant increase in investigations and settlements, particularly under Code of Practice 9 (COP9).

HMRC investigations 

HMRC sees public-private partnerships as an increasingly effective way for law enforcement to work collaboratively with private organisations to identify, analyse and disrupt economic crime. An example of this is the Tax Crime Alliance (TCA), a select group of professional advisers established to develop new approaches and policies to tackle tax crime. Investigation, however, cannot be truly effective unless it is also fair, and HMRC has a duty to act fairly. One only needs to look at a various prosecutions conducted by the Serious Fraud Office to realise that prosecutorial unfairness can cause trials to collapse. HMRC has also been involved in such cases. The setting up of the TCA is to be welcomed, but it is to be hoped that HMRC, as it develops policy, will recognise that fairness and effectiveness go hand in glove.

HMRC states that it is committed towards increasing public trust. In that regard, in 2018 the House of Lords published a report into HMRC’s powers, resulting in their publishing more data and information about the exercise of its powers. Although the data is opaque, there are some telling patterns. HMRC claims that it has 400 ongoing investigations in relation to “sophisticated offenders”. However, in the five years leading up to 2020, the number of individuals charged with evasion halved. Of those who were charged in 2019/20, only around 5% (32 people) were categorised as wealthy individuals. It is evident that substantially more work is to be done in order to meet HMRC’s stated target of prosecuting 100 HNW individuals per year.

In March 2021, HMRC recruited over 1,200 additional investigators under the auspices of the Taxpayer Protection Taskforce as a part of its drive towards stricter enforcement. It is anticipated that a significant amount of their work will be dedicated to COP9, particularly given the fact that during the pandemic the number of COP9 investigations fell significantly from an average of around 475 per year to 278 during the first ten months of the tax year.

Under COP9, taxpayers are sent a letter informing them that they are suspected of fraud – indeed that “we think that you have acted dishonestly in order to pay less tax and/or duty”. The taxpayer is then invited to “come clean” (usually by commissioning and presenting a report on their own wrongdoing) in relation to their “deliberate conduct” within 60 days in order to avoid criminal investigation into that conduct. Given that stark choice, many taxpayers are often reluctant to challenge it as the alternative (criminal investigation with a view to prosecution) is much worse.

COP9 is much loved by HMRC. A former director of the old Special Compliance Office once famously said that the reason they like it is because they simply get a cheque and a report. Little expensive investigatory work is required, and in any event COP9 investigations are far cheaper for HMRC than prosecutions.

In times of fiscal restraint it is unsurprising that HMRC will favour COP9 over criminal investigations, but even 40 years later it is worth remembering their evidence to the Keith Committee that, unless there is a credible threat of prosecution, tax evasion will not be effectively deterred. In addition, the Keith Committee found that HMRC is entitled to run a selective criminal investigation policy, as long as its criteria of selectivity are fair. Unfortunately it has long been suspected that this is not so, and that particularly in the face of criticism by the Public Accounts Committee that not enough cases are prosecuted, HMRC unfairly inflates its statistics by criminally investigating smaller, low-level cases whereas large cases of tax fraud enjoy the benefit of civil settlement. Perhaps “enjoy” is the wrong word with COP9 – but it's clearly better than being criminally investigated.

Despite the fact that COP9 is so much cheaper as a method of dealing with tax fraud, HMRC will want to criminally investigate a number of cases both big and small in order to maintain effective deterrence, and if they win they can be expected to bask in the publicity. What they do not want is to lose high-profile cases, and they will rightly be wary of that possibility.

Under COP9, taxpayers are only given immunity in respect of specific disclosures that they admit to be deliberate. HMRC does not give the taxpayer any indication as to the conduct that it suspects. This can be particularly invidious; if the taxpayer makes multiple disclosures of which HMRC was not previously aware, but fails to make a disclosure of the suspected behaviour, the taxpayer will have no immunity in respect of the latter. Worse still, the admissions made mean that the taxpayer is effectively a self-confessed fraudster, which can not only be taken into account in relation to the COP9 enquiry but also in any subsequent criminal investigation.

The fear is that individuals could be tempted to take the path of least resistance and admit deliberate/dishonest conduct in order to avoid the possibility of criminal investigation. The promise of immunity arguably comes very close to being an improper inducement to admit wrongdoing. Confessions obtained by way of coercion or inducement are inherently unreliable, and within the criminal justice system are near-automatically excluded as evidence. It has been held, for example, that a promise of bail or a promise that a prosecution would not arise from any admission is inherently unreliable. Why should a confession obtained in the context of COP9 be any different?

The COP9 “market” has traditionally been dominated by accountancy firms and not lawyers, and indeed it is still the case that the most effective representation for clients can be obtained by law firms working alongside accountancy firms. What solicitors can bring to the table, as well as the ability to argue points of technical tax law, is knowledge and experience of the law on procedural unfairness and of dealing with other investigatory authorities (eg, the Serious Fraud Office, the Financial Conduct Authority, etc). If HMRC does act unfairly it is really only when it is challenged by those with deep experience in challenging the unfair conduct of other investigatory bodies that this unfairness can be called to account.

Targeting of enablers 

Over the next year, HMRC is likely to focus on two particular areas: evasion allegedly dressed as avoidance; and the shadow economy of enablers. The topics clearly overlap substantially, and are also the subject of HMRC’s recent policy paper (published in July 2021) setting out its proposals to “clamp down on promoters of tax avoidance”.

Proposed legislative changes include:

- Making changes to the Disclosure of Tax Avoidance Schemes (DOTAS) rules in order to allow HMRC to obtain material, and to identify taxpayers using suspect schemes at an earlier stage than before;
- A new power for HMRC to seek freezing orders in respect of promoters, in order to stop them from using or dealing with assets before the imposition of penalties for any breaches of anti-avoidance rules. The power will allow HMRC to obtain an order even before penalty proceedings have been commenced;
- Additional penalties for UK entities facilitating the promotion of tax avoidance by offshore promoters;
- A power for HMRC to present a winding-up petition for companies operating “against the public interest”. The new measures will allow HMRC to wind up companies where they have engaged in significant non-compliance with anti-avoidance legislation; and
- Naming and shaming provisions in respect of promoters, warning taxpayers of possible risks.

HMRC’s stated aim is to disrupt the activities of promoters, and to encourage taxpayers to “steer clear” and leave tax avoidance arrangements (whether lawful or not). The blurring of lines between avoidance and evasion continues to be increased with the pandemic being used as a further justification.

Information powers 

In addition to the above proposed powers, there are additional new measures to deal with alleged tax non-compliance. Under Section 126 of the Finance Act 2021 (which came into force on 10 June 2021) HMRC can now issue Financial Institution Notices (FIN) requiring financial institutions to provide information about taxpayers for the purposes of UK or foreign tax investigations or to pursue tax debts. Previously in order to obtain such information, if the taxpayer did not consent, HMRC had to obtain Tribunal approval. Now no such approval is needed. HMRC sought to justify the change by arguing that it took too long to gain Tribunal approval – on average HMRC says it takes twelve months.

On the face of it, this is an extraordinary justification to remove an important safeguard. Frankly, the same reasoning could be used in relation to criminal trials. After all, it does take a long time to get cases to the Crown Court and to get trials heard. One asks rhetorically: would it not be better simply to abolish trials and have people convicted of tax fraud simply because HMRC said they were guilty?

It is noteworthy that the Government’s published “Summary of Responses” to the consultation reported that “a large proportion of respondents felt that the current process of obtaining FTT approval provided a robust safeguard and raised questions around the ability of internal HMRC safeguards alone to replace it”.

Nonetheless the Government proceeded with the new proposals, which now have statutory effect. Frankly, one wonders why they bother with consultation at all. Maybe HMRC should only listen to the results of consultation if the consultation happens to agree with HMRC’s views?

Judicial Review will be the only (expensive) remedy, but clients as ever will expect practitioners to be astute in seeking to find legal remedies for any abuse of power by HMRC.