Tax
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.