TAX: CONTENTIOUS: FRAUD: An Introduction to UK-wide

Following the end of the Covid-19 lockdowns in 2020 and 2021, HMRC’s attentions were focused on attempting to close the tax gap. However, since then the cost of living has been skyrocketing in the UK, with the annual rate of inflation reaching 9.9% in August 2022, constituting a 30-year high, necessitating support packages of more than £1 billion. In that context, the need for HMRC to recoup as much lost tax as possible in order to address this crisis is perhaps more urgent than it has been for many years.

£1 billion recovered from tax fraud 

Given the above, HMRC’s recent press release announcing that £218 million had been recovered by the Fraud Investigation Service in 2020-21, bringing its five-year total up to £1 billion, on the face of it, appears to be a step in the right direction. However, the current tax gap thought to be the result of fraud (i.e. the difference between the expected income from tax and the actual receipts) is an estimated £18 billion. In addition, HMRC estimates a further £5.5 billion paid out under the 2020-21 furlough scheme was a result of fraud or error. Clearly, there is massive scope for HMRC to recover further proceeds.

The question for practitioners, given the decrease in resources and the urgency to recoup money for the exchequer, is what means HMRC will be using in order to address the problem. Historically, in these circumstances, the number of criminal investigations has decreased, and alternative methods have instead been relied upon in order to deal with suspected tax fraud.

Methods of recovery 

HMRC has a number of tools at its disposal which allow for the recovery of funds, and also the investigation of offences. They include:

- Powers of civil recovery in summary proceedings, including of funds in bank accounts that represent the proceeds of unlawful conduct (either in the UK or overseas)

- Corporate offences of ‘failing to prevent’ the facilitation of tax fraud which increase the incentives on companies to report frauds by their clients or customers

- Powers to recover sums civilly, including by use of the Contractual Disclosure Facility under Code of Practice 9

In addition, it is apparent that HMRC has become increasingly reliant on so-called “nudge letters”, which became more utilised in 2017 following the introduction of the Common Reporting Standard under which HMRC received substantial amounts of information in relation to bank accounts held by UK taxpayers offshore.

Nudge letters are sent to taxpayers who are suspected of having made errors in their tax returns, asking them to disclose any such errors. They are asked to sign a “certificate of tax position” essentially confirming that the taxpayer has disclosed any and all errors across all tax years. Incorrectly signing a certificate can result in criminal investigation and prosecution.

The most recent letters related to HMRC’s investigation into Euro Pacific Bank in respect of alleged tax evasion and money laundering.

Letters have also been issued in relation to suspected furlough fraud, with employers being informed by HMRC that they are suspected of having overclaimed under the Coronavirus Job Retention Scheme. Others have been sent in relation to various issues including into suspected improper Research and Development tax relief claims, improper claims for rollover relief on residential properties, suspected failures to notify HMRC of CGT gains in connection with crypto assets, suspected errors with regard to P11D benefits, suspected failures to notify HMRC of non-resident corporate income, and suspected failure to notify HMRC of disposals by persons of significant control within unquoted companies.

It is not surprising that HMRC has sought to rely on nudge letters with increasing frequency in recent times. They are a highly efficient and cost-effective mechanism of dealing with matters, and the burden is placed on the taxpayer to carry out the investigative work and to make a disclosure.

However, recipients of nudge letters face a number of inherent dangers. HMRC’s own criminal investigation policy states that when considering whether a case should be investigated using the civil fraud procedures, or whether a criminal investigation should instead be used, one factor will be whether the taxpayer has made a complete and unprompted disclosure of offences. Whilst this does give some small comfort, it is very important for practitioners to deal very carefully with any request by HMRC for a voluntary disclosure.

When HMRC invites individuals to make a disclosure, they are told that it is their opportunity to review their tax affairs, and in the event of an irregularity, to inform HMRC of the same so that it can be “put right”. They are encouraged to bring their tax affairs up to date using facilities such as the Worldwide Disclosure Facility (WDF).

Under the WDF, taxpayers are required to notify HMRC of an intention to make a disclosure, following which they have 90 days to gather information, calculate final liabilities (including tax, duty, interest and penalties) and complete a full disclosure of all previously undisclosed UK tax liabilities. Furthermore, taxpayers are required to self-assess their own behaviour and notify HMRC whether their conduct was deliberate or negligent.

The terms of the facility state that HMRC “reserves complete discretion to conduct a criminal investigation in any case”. This would include a disclosure of a liability with an explanation setting out a reasonable excuse which HMRC did not accept.

It is therefore possible that a taxpayer could make a disclosure of wrongdoing, and HMRC could use that disclosure as the basis for a prosecution. Indeed, the fact that a disclosure followed a nudge letter could mean that, de facto, it might not be deemed to be unprompted.

In such circumstances, there may be an argument that the taxpayer had acted to their detriment based on an implied promise not to prosecute, and the violation of that promise would represent an abuse of process. However, following the principle set out in R v Abu Hamza [2007] 1 Cr.App R, such an approach might not succeed, as the current law is that a prosecution will not constitute an abuse of process unless there has been an unequivocal representation by those with the conduct of the investigation that the defendant will not be prosecuted. Hamza confirms that a mere assurance against prosecution does not automatically render subsequent proceedings abusive.

COP9 

Similarly, those who voluntarily seek to make a disclosure under Code of Practice 9 cannot be certain that they will be offered CDF, and could therefore be inviting a criminal investigation. That said, it does appear that the risks involved in seeking to make a disclosure under the CDF are less obvious than under the WDF, not least because FIS investigators who deal with COP9 disclosures are more familiar with voluntary disclosures involving fraudulent behaviour, and on a practical level therefore would be less likely to register cases for criminal investigation.

Nonetheless, the last true immunity offered by HMRC for self-disclosure was under the Liechtenstein Disclosure Facility, which ended in 2015. In the absence of a genuine guaranteed immunity, HMRC ought to provide much more concrete guidance for those who wish to make an approach for a voluntary disclosure. Nebulous promises are not sufficient in such circumstances.

Whilst practitioners are assured that there is a rigorous process in respect of the registration of cases by HMRC for COP9, it has long been suspected that HMRC sometimes “shakes the tree” in the hope of a disclosure. Frequently, what happens is that taxpayers are offered COP9 in connection with suspicions which are quickly dispelled, but a number of highly technical tax issues are identified by their advisers which are disclosed instead. It is therefore increasingly important for fraud practitioners to be able to understand and deal with a plethora of taxation matters.

In order to gain some insight into whether cases are being registered for COP9 in order speculatively to seek evidence of suspected tax irregularities, without reasonable grounds for suspecting tax fraud, it would be useful to be able to see how many cases are settled without any penalty being paid. 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.

In mid 2022, a Freedom of Information Request was made asking for details relating to: the total number of COP9 enquiries opened for the y/e 5 April 2022; the number of acceptances; the number of denials; and of the denials, how many resulted in a deliberate or deliberate and concealed penalty.

HMRC responded by stating that its case management system does not record acceptances and denials, and that it was therefore impossible to determine the number of cases resulting in a penalty. Whilst disappointing, it is hoped that HMRC will be able to provide further clarity and transparency in this regard in future, not least in order to dispel any suggestion that COP9 is being used inappropriately.

Criminal investigations 

Following on from the above, based on the figures published by HMRC, there has in the past been some criticism that it has sought to bolster its prosecution figures by focusing on relatively small cases. However, it appears that it has taken that criticism on board and now seems to be targeting substantial and serious cases for criminal investigation.

As is well known, HMRC operates a (published) selective criminal investigation policy, 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”. In the past there used to be a prosecution rather than a criminal investigation policy. The policy was said 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”. On the face of it, if only some cases were to be prosecuted, it was fair that those should be the more serious cases to avoid the anomaly of more serious tax fraudsters being dealt with using civil means and less serious offenders being prosecuted.

Perhaps recognising this, HMRC’s published targets now refer to “complex crime investigations”. Furthermore, in its recently published policy paper titled “HMRC’s approach to tax fraud” it states that it uses criminal investigations selectively to ensure “value for money for the taxpayer and the maximum impact on tax fraud”. It also confirms that in recent years it has “deliberately focussed on the most harmful, complex and sophisticated frauds” in order to reach “the right outcome for the UK, rather than chasing arbitrary targets for arrests and prosecutions”.

Contributed by Harry Travers and Greg Mailer of BCL Solicitors LLP