HMRC explores tougher methods for publicising tax fraud by the wealthy

Public Accounts committee criticised HMRC’s lack of strategy

HM Revenue & Customs (HMRC) is exploring how it can better publicise fraud investigation outcomes and increase the impact of the sanctions it uses, in order to dispel the myth “people are getting away with tax evasion”.

The department said it wants to give the public confidence it is going after wealthy tax evaders and also to deter others from pursuing fraudulent activity.

This followed criticism from the Public Accounts committee in a report in April, which told HMRC it must “do more to tackle tax fraud and counter the belief that people are getting away with tax evasion.”

It said HMRC needed to increase the number of its investigations and prosecutions, including in relation to wealthy tax evaders, and publicise this work to deter others from offending.

HMRC accepted the recommendation and said it aims to have its research completed by the end of the year, with a view to having any new measures implemented in February.

Tax evasion is different from tax avoidance in that it is a criminal offence. HMRC uses a variety of methods to tackle serious tax frauds, including levying large penalties and initiating civil fraud investigations. But it usually reserves criminal investigations for a small number of cases due to their lengthy, expensive and uncertain nature.

In March last year, the government started consultations on implementing a new corporate criminal offence for firms failing to prevent tax evasion. If enacted this will implicate advisers who have inherited clients with offshore bank accounts, Pinsent Masons head of tax Jason Collins said at the time.
Under the old rules firms and their employees have to report any suspicious activity by their clients and once they have done that, responsibility passes to HMRC.

Under the proposed rules, firms will not be exonerated by simply informing the tax office but will be held to account for any client tax evasion they have failed to prevent, including structures put in place by former advisers of current clients.

The Public Accounts committee had heard evidence from HMRC on its approach to tackling tax fraud in January, following a report from the National Audit Office on the issue out last December.

The government said prosecutors had charged 1,288 people in 2014/15 as a result of its criminal investigations. This protected more than £2bn in revenue from being lost to criminal activity, it added. It also found more than 40% of convictions were of people evading more than £50,000 – almost twice the UK median salary.

The government had already pledged to triple investigations into serious and complex tax crime in the 2015 Summer Budget. It will focus particularly on wealthy people and corporates, including cases with offshore evasion risks, it said.

The government refused, however, to put an ‘optimum’ number on the amount of prosecutions it wants HMRC to undertake, as proposed by the committee.

It said isolating and quantifying the specific impact of a prosecution on deterring others was complicated as prosecutions were only one element of a wider package of preventative measures designed to deter evasion.

It also pushed back on claims HMRC did not have a clear strategy for tackling tax fraud. The government said maximising revenue and bearing down on avoidance and evasion was one of HMRC’s primary objectives.

Over recent years, it has consistently increased both revenue and the amount it recovers through compliance activity, driving down the tax gap to 6.4% of liabilities, it added.

But the committee said it could not judge how effective HMRC was at reducing the tax gap because the way it reports its performance was too confusing. It asked the department to clearly set out in its annual reports the relationship between its compliance yields and changes in the tax gap “in a way that is accessible for everyone to understand”.

Unintended Side-Effects

There are concerns in the industry that HMRC’s increased clampdown on avoidance and complex tax fraud is deterring people from using legitimate tax-planning tools.

Research by Old Mutual Wealth has already detected the first signs of such unintended side-effects, the firm’s financial planning expert Rachael Griffin said in January.

She explained: “We have previously expressed concerns that the clampdown on avoidance risks discouraging the use of legitimate, mainstream planning tools such as trusts.

“There is a clear difference between these instruments and the avoidance schemes that are under pressure from HMRC’s efforts to strengthen the tax avoidance disclosure regime. Worryingly, however, our research suggests advised clients are being put off legitimate tax planning methods.”