Readers of this publication may have their own view as to what constitutes “fraud”. It is very likely that those views will differ from that of HMRC. “Fraud” is not defined in tax legislation, and HMRC takes the view that “tax fraud may be considered in terms of someone seeking to obtain a material tax advantage by dishonesty”. The offence requires dishonesty: obtaining, or seeking to obtain, a material tax advantage is not enough.
Failing to notify HMRC of taxable income may be regarded as fraud by the tax authority. Using a business to pay for personal expenditure, or creating an invoice, or other document, to cover cash extracted from a business, could also be viewed in the same way. These are just a small sample of situations that the tax authority may regard as fraudulent.
HMRC’s policy
HMRC’s policy is to deal with cases of suspected fraud by use of the Contractual Disclosure Facility (CDF), a civil process, wherever possible. Criminal investigation is reserved for cases where the conduct involved is such that only a criminal sanction is appropriate, or where HMRC considers that it needs to send a strong deterrent message. HMRC reserves discretion to conduct a criminal investigation in any case. The aim is to conduct these investigations across a range of offences, and in the various areas for which it has responsibility.
Criminal investigation
When HMRC decides to pursue criminal proceedings against a taxpayer, the first he may know about it is when he is invited to attend an interview under caution, or when he is subject to a “dawn raid”. The raids are conducted by HMRC officers using their powers under the Police and Criminal Evidence Act 1984 (PACE), and are traditionally carried out early in the morning, hence the moniker. The target taxpayer, and any others suspected of fraud, will typically be arrested and removed from the premises to the local police station for questioning later in the day. The taxpayer’s home and business premises will be raided by HMRC, together with any other relevant premises, which can include those of professional advisers. HMRC investigators will often be accompanied by police officers on a raid. The impact and disturbance to a taxpayer’s domestic routine cannot be underestimated.
HMRC’s civil investigation process
HMRC’s civil fraud investigation process – the CDF – is conducted by specialist officers. Under the process, taxpayers suspected of fraud are invited to enter a contractual arrangement with HMRC. Protection from prosecution is only given where the taxpayer meets certain criteria. HMRC considers that the CDF is compliant with the Human Rights Act 1998, although that has not been tested in the courts.
Voluntary admissions of fraud
Although rare, it sometimes happens that a taxpayer will wish to make a voluntary admission of fraud to HMRC. The reaction of most advisers will be to approach the taxpayer’s normal office with the disclosure. This can be catastrophic for the taxpayer, and may result in a criminal investigation. Any such admission must be made in a managed way to ensure that the required outcome (usually that a criminal investigation will not follow) is obtained. There are, usually, at least a couple of options for the taxpayer in this position, and it is essential that the approach is made to the right part of HMRC.
The admission of fraud can present a particular problem where the taxpayer is a professional, and a member of a regulated body, as such an admission may need to be notified to that professional body. The Liechtenstein Disclosure Facility (LDF), introduced in 2009, provides a route to, in most cases, immunity from prosecution for tax offences, and does not usually trigger a requirement to report to the taxpayer’s professional body.
Tax fraud and the property sector
There have been several prosecutions involving taxpayers in the property sector in recent years. In one case, an architect who allowed his offices to be used in connection with a tax fraud was jailed for three and a half years. A property developer who failed to disclose an offshore bank account when he was subject to a civil inquiry by HMRC was ordered to pay fines and costs of almost £500,000. Details of the bank account, which had been closed, came to light after information was passed to HMRC.
A property developer who bought and sold properties without paying tax on the profits was convicted of tax evasion. The developer was caught after police officers searched a family address on an unrelated matter and found more than £100,000 in cash. He was sentenced to two years. In another case, a company director was sentenced to 18 months in prison after using his business to pay for improvement works to his home. In most cases where a taxpayer is found guilty of tax fraud, confiscation proceedings will be initiated to reclaim the proceeds of the crime.
Final words of caution
When HMRC pursues a case of suspected fraud, whether using its criminal powers or civil fraud investigation process, it uses specialist officers. Taxpayers should, when faced with a fraud investigation into their affairs, or where they are considering making a voluntary disclosure, seek advice from a tax investigation specialist. This writer has seen numerous instances where taxpayers have failed to take specialist advice. In most cases, there were serious financial consequences for the taxpayer, and, in some, it cost them their liberty.
Phil Berwick is a partner (non-lawyer) at Irwin Mitchell LLP
