EXPERT VIEW: So Exactly How Does The UK's HMRC Catch Tax Evaders?

Fiona Fernie BDO Partner 6 March 2014

EXPERT VIEW: So Exactly How Does The UK's HMRC Catch Tax Evaders?

Fiona Fernie, partner in the tax investigations team at BDO, looks at how the UK authorities are dealing with tax evaders and the kind of issues that professionals in the wealth management business must apprehend.

The following article, by Fiona Fernie, partner in the tax investigations team at BDO, concerns how the UK authorities are dealing with tax evaders and the kind of issues that professionals in the wealth management business must apprehend. As is always the case, the views of the author are welcomed by this publication, but it does not necessarily agree with all of the views expressed.

Tax evasion has received a great deal of attention, nationally and internationally, in recent years, particularly since the economic crisis focused the minds of government ministers on the need to raise as much revenue as possible.

Resources and results

In the UK, increasing amounts have been allocated to HM Revenue & Customs specifically to combat tax evasion and improve compliance. In 2010, a huge £917 million ($1.534 billion) was allocated from efficiency savings with an aim of generating additional compliance revenues of £7 billion a year by 2015. In 2012, a further £77 million was allocated to specific additional projects aimed at reducing evasion and avoidance, and HMRC recently announced that it had already brought in an extra £1.4 billion of tax revenue by investing £45 million in new and advanced information technology.

So, how does HMRC catch evaders?

For some time now, HMRC has adopted a classic “carrot and stick” approach – a carrot of reduced penalties and/or tax liabilities for those who come clean and make a voluntary disclosure, and a stick of higher penalties, prosecution and recovery of assets for those who do not.

The carrot

HMRC’s first voluntary disclosure facility - often incorrectly described as an “amnesty”, as all tax liabilities still had to be paid in full - was the Offshore Disclosure Facility (ODF), launched in 2007, offering a low 10 per cent penalty. This was followed in 2009 by the New Disclosure Opportunity, again featuring a 10 per cent penalty (but 20 per cent for anyone already contacted by HMRC after the ODF). These together raised over £600 million up to July 2013.

In 2009 HMRC also launched the very different Lichtenstein Disclosure Facility (LDF), which not only offered a 10 per cent penalty but also constituted a real (albeit partial) amnesty, limiting the collection of undeclared taxes to the previous 10 years.

The LDF is still open until April 2016 and, uniquely, can be used to disclose any undeclared income or gains by opening a connection with Liechtenstein. However the period for which tax is due under the LDF still runs from 1999, meaning that the ‘amnesty’ element of the facility decreases year by year.

More recently, in 2011, the UK and Switzerland entered into a controversial arrangement, under which taxpayers could either make a voluntary disclosure to HMRC or opt for a one-off payment in Switzerland to settle historic liabilities at favourable rates, with ongoing future deductions in respect of income and gains. HMRC initially hoped to recover several billion pounds under this arrangement, but it remains to be seen how much will actually be received.

The stick

In 2008 a new penalty regime was introduced, with maximum penalties of 100 per cent for ‘deliberate and concealed inaccuracies’. In 2011 HMRC’s focus on offshore tax evasion led to the introduction of new penalties of up to 200 per cent in such cases. Deliberate defaulters involving liabilities of over £25,000 are now also “named and shamed” by HMRC. An additional 200 criminal investigators have also been recruited by HMRC, and prosecutions for tax evasion have risen from 165 in 2010/11 to a projected 1,165 in 2014/15. HMRC also now routinely takes asset recovery proceedings to ensure that criminals do not benefit from tax fraud.

HMRC uses a variety of methods to catch evaders, including:

-- Sector-specific campaigns and initiatives: HMRC has now targeted a considerable number of sectors such as e-marketing, plumbers, electricians, health workers and businesses that have failed to register for VAT. Advance publicity aims to encourage voluntary disclosure before increased investigative activity by specialist teams detects evaders. These campaigns had raised around £200 million up to July 2013;

-- Taskforces: these are regional initiatives targeting specific businesses in areas where there is evidence of tax evasion. Over 100 taskforces have been launched, or are planned, for a wide range of businesses including the clothing industry, restaurants and the motor trade in various regions of the UK. HMRC expects to recover about £90 million a year as a result;

-- International cooperation: HMRC continues to enter into tax information exchange agreements with other countries and growing international cooperation at European Union and other levels is rapidly reducing the scope for investing funds offshore without HMRC being notified of income or gains arising;

-- Information technology: HMRC is investing in new technology and in September 2013 it was granted access to information from companies which process the card payment transactions of businesses. HMRC will use data on the number and value of card transactions to check the turnover figure in accounts submitted by businesses. HMRC also uses the internet to search for sources of income undeclared by individuals and businesses advertising items or services for sale, in addition to the more traditional sources such as local newspaper advertisements;

-- Informers and stolen data: some countries have formal arrangements to pay informers a percentage of the tax that is recovered as a result of information being passed to the tax authorities. HMRC has not yet gone down that road, but it does have a Tax Evasion Hotline for people to report suspected evasion. Divorces and disputes with employers, landlords and others are common triggers to reporting suspicions. HMRC has not been averse to acquiring and using stolen data, with two well-publicised instances of acquiring bank account details contained on stolen disks. However, following the 2011 agreement with Switzerland the UK government declared that it would not “actively seek to acquire customer data stolen from Swiss banks”.

It’s getting tougher
Governments throughout the world are determined to stop tax evasion. It is undoubtedly getting harder for tax evaders and the consequences when they are caught are becoming more severe.

However, there are currently still several ways of making a voluntary disclosure, and anyone with undeclared income or gains should take expert advice as soon as possible on the best way of “coming clean” in their particular circumstances.

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