Harry Travers, Greg Mailer and Umar Azmeh review HMRC's approach and argue that its failure to produce meaningful statistics should not mask the fact that it is criminally prosecuting low-hanging fruit.
In common with all other areas, the overwhelming focus of the industry this year has related to the impact of the Covid-19 pandemic. In April 2020, HMRC announced that it would largely suspend tax avoidance investigations, partly to allow its investigators to focus on managing the government Coronavirus Job Retention Scheme (the furlough scheme), along with dealing with taxpayers who needed additional time to settle outstanding tax bills. As a result of the Covid-19 pandemic, income to the Exchequer has been hugely reduced due to a combination of unemployment, tax deferrals, and the absence of penalties resulting from investigations. By the middle of the year, UK tax receipts had decreased by approximately 50% at the same time as the budget deficit rose from a forecasted £55bn to a record £370bn. In June 2020, HMRC announced that it would be resuming its investigations.
Over the last fifteen years the tax gap has been steadily closing, falling from 7.5% in 2005/6 to a record low 4.7% in 2018/19, when more than 95% of tax due was paid. However, this downward trend will clearly be halted by the Covid-19 pandemic. Accordingly, it is highly likely that the next year will see HMRC significantly intensify its focus on tax avoidance and evasion in order to close the huge gap in the public finances. It is anticipated that there will be an increase in profitable settlements, particularly under the Contractual Disclosure Facility ('CDF')/Code of Practice 9 ('COP9'). Additionally, it is inevitable that HMRC's criminal investigation teams will be required to address the criminal activity that will no doubt flow from the Covid-19 pandemic itself. For example, HMRC has set up an online facility for the public to report suspected abuse of the Job Retention Scheme, in respect of which HMRC's CEO Jim Harra expressed concerns about the potential for fraud. The next year will almost certainly see a consequent increase in tax enquiries and reviews, followed by criminal investigations, COP9 enquiries and prosecutions.
HMRC Process and Procedure
In the meantime, the Covid-19 pandemic has also impacted upon a number of proposed tax measures, including a power evaluation exercise which was due to take place during 2020. In December 2018, the House of Lords published a report into HMRC's powers, titled "Treating Taxpayers Fairly". In response to that report, in mid-2019, HMRC published a written statement regarding its powers and taxpayer safeguards. It expressed a wish to address some of the issues raised in the House of Lords report, and to focus on its commitment to increasing transparency and enhancing public trust by publishing more data and information about the exercise of its powers. In November 2019, HMRC published some data, including the number of closed civil and criminal compliance checks, total prosecutions and criminal sentences, as well as the outcomes of court decisions. Further data is also contained within its annual report. In 2020, a "Deep Dive" was due to take place in order to evaluate HMRC's transparency efforts; however, the Covid-19 pandemic has delayed that process.
The data provided by HMRC is at a very high level: it is difficult to discern from the information provided whether HMRC's powers are being used appropriately or fairly. Basic figures are provided setting out the number of prosecutions, charging decisions, custodial sentences, closed criminal investigations, closed compliance checks, and wins and losses in the tribunal. However, much more detail would be required to be able adequately to assess the use by HMRC of its powers. In particular, there is no analysis as to the nature of the convictions. Practitioners have long suspected that the number of HMRC prosecutions has been inflated by the prosecution of a raft of cases that are both less serious and more easily proven. This approach is intrinsically unfair. HMRC operates a (published) selective criminal investigation policy, supposedly 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". COP9 is meant to be used for the other cases. There used thus to be a prosecution rather than a criminal investigation policy, which was meant 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". This approach was upheld by the High Court in ex parte Mead and Cook  1 All E.R. 772. However, since Mead, it is apparent that the criteria of selectivity appears to have been all but abandoned, such that the underlying conduct of those subject to COP9 is often far more serious than that of those criminally investigated.
HMRC has more recently indicated that it has started putting more resource into the more serious cases - often involving alleged offshore evasion as well as the (controversial) borderline between tax avoidance and tax evasion. It remains to be seen whether their published data reflects that indication. That said, in July 2020, following Freedom of Information ('FOI') requests, HMRC published some information in that regard in respect of its 2019 figures. In 2019, HMRC investigated 430 sophisticated tax evasion cases, a 26% rise from the previous year. Given the official target set by HMRC in 2019 of 100 prosecutions from criminal investigations into serious and complex tax crime by 2020, transparency and trust would clearly be better addressed if a breakdown as to the type of prosecutions were provided by means other than FOI requests.
The new offence of offshore tax evasion in section 166 of the Finance Act 2016 came into force on 7 October 2017 in respect of tax year 6 April 2017 to 5 April 2018 onward. A little earlier, Part 3 of the Criminal Finances Act 2017 had come into force creating the new corporate offences of failure to prevent the facilitation of tax evasion. It was anticipated that 2020 would see a substantial upturn in the number of corporate investigations, particularly given the target announced in the 2015 budget of tripling the number of complex tax crime investigations by 2020. Under the new offshore evasion offence, taxpayers can be imprisoned for six months for mere carelessness. This is a matter of huge contentiousness, as tax evasion should only ever be an offence of dishonesty.
With regard to the corporate offences, as is well known, it is very difficult for prosecuting agencies successfully to prosecute corporates due to the "identification principle". HMRC's published guidance states that a corporate will be held criminally responsible where it fails to take reasonable steps to prevent associated persons from aiding, abetting, or being knowingly concerned in, the fraudulent evasion of tax by another person. In order to establish a defence to the new offence, the corporate will have to prove on the balance of probabilities that it had "reasonable procedures" to prevent the facilitation.
Following a number of FOI requests, in February 2020, HMRC for the first time released figures as to the number of corporate criminal offence ('CCO') investigations (nine), and the further anticipated investigations (twenty-one). As alluded to above, data regarding the number of corporate criminal investigations would be welcome without the need to resort to FOI requests; it has been indicated that the number of live cases will be published twice a year.
The comparative lack of activity in relation to both the offshore tax evasion and CCO offences is telling. Given the issues outlined above, it does appear that HMRC seems to be somewhat reluctant to use the new legislation, and in the opinion of many practitioners, the offences have no place on the statute books. Significantly, there is no analysis in relation to the use by HMRC of the COP9 procedure. The essence of COP9 is that an individual is told he or she is suspected of fraud but is not told anything about the nature of the fraud that is suspected or the grounds for suspicion. The individual is then invited to "own up" to their "deliberate conduct" within 60 days, in return for which HMRC will not pursue a criminal investigation into that conduct. If the individual makes a disclosure of fraudulent conduct, he cannot therefore be criminally investigated in relation to that conduct. He is, however, vulnerable to criminal investigation in relation to tax irregularities – disclosed or otherwise – which he does not admit are deliberate.
HMRC indicates that in 2019 it raised £3bn from tackling organised crime, but HMRC's published figures do not indicate the amount of tax and penalties that was 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. Many in the industry take the view that COP9 is being used inappropriately in order speculatively to seek evidence of suspected tax irregularities, without there being reasonable grounds for suspecting that tax fraud has been committed. The rationale is that by "shaking the tree", HMRC is often able to receive substantial settlements. Full transparency in relation to the use of COP9 would help to counter that suspicion, and it is hoped again that FOI requests will not be necessary in that regard.
A new and dishonest approach?
The Covid-19 pandemic has also prompted a significant development in relation to HMRC's approach to 'enablers' who devise and market ineffective tax avoidance schemes. The All-Party Parliamentary Group on Anti-Corruption and Responsible Tax called for new measures to curtail "aggressive tax avoidance" facilitated by 'enablers', and published a policy paper proposing what they somewhat euphemistically call a "streamlined" dishonesty test for criminal prosecutions of tax avoidance, and also a lower threshold for civil penalties.
Under the new "threshold test", the requirement for dishonesty would be removed, and an enabler of aggressive tax avoidance schemes would be guilty "where it would not be reasonable to consider that the scheme was a reasonable one" (the 'double reasonableness test').
In her introduction to the paper, Dame Margaret Hodge stated that "to shoulder the fiscal burden of the coronavirus crisis, we must all pay our fair share. Now more than ever it is essential that we crack down on those that do not. It is absolutely the right time for us to be even tougher on aggressive tax avoidance...The enablers of failed tax avoidance schemes are breaking the law, plain and simple." It is worth noting that Dame Margaret Hodge (and she is not the first politician to do so) seems deliberately to be blurring the distinction between tax evasion (criminal and unlawful), and ineffective tax avoidance (ineffective for tax purposes, but not criminal).
That paper argues that promoters of aggressive tax avoidance schemes have not been pursued in criminal investigations. However, that is not correct. HMRC has invested huge resources in criminally investigating the promoters of aggressive schemes, for example the Vantis and Montpelier schemes, and certain film schemes, and has obtained convictions in some of these cases. Indeed, the crackdown has been so effective that some in the industry believe that HMRC has intentionally caused even legitimate advisers to be in terrorem of promoting avoidance schemes.
To remove the requirement to prove dishonesty from the common law offence of cheating, or conspiracy to cheat, would be a huge step with far reaching consequences possibly in other areas of the criminal law. The mere fact of being criminally investigated can be enough to destroy a person's career. But the idea that one can be guilty of tax fraud or cheating without being dishonest is fundamentally misconceived.
The need for the prosecution to prove dishonesty is a crucial safeguard for an accused. Furthermore, the use of the double reasonableness test could cause serious difficulties because it would be extremely difficult for the jury to understand and apply: if the Crown are to prove tax fraud, they must have to prove dishonesty.
Dame Margaret Hodge, in the foreword to the paper, says that "without documentary evidence to prove dishonesty", enablers "can insist they believed their schemes would work, and plead innocence". From that, the report makes the quantum leap that it should no longer be necessary for dishonesty to be proven. But in fact, dishonesty – if it exists – is typically proved by inference from conduct. The law is perfectly capable of identifying and penalising dishonesty without removing the need to prove that crucial element.
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