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Prosecuting tax evasion is hard. Because, evidence.

February 14, 2015

Prosecuting tax evasion is hard.  Or at least, I imagine it is.  Because in all my time in the Inland Revenue and HMRC, I was never involved in a prosecution case.

Prosecutions are dealt with by a separate bit of the department.  Because, evidence.

Say I looked at a set of accounts and asked for some backing documents and then someone sent me a document that was a forgery.  Should they have been prosecuted?

Say it was an appeal: say they told me they’d appealed.  Say the thing they sent me was backdated to make it look like they’d appealed in time, and I spotted it was a forgery – could prove it was a forgery, in fact, because it referred to a thing that hadn’t happened at the purported date of the document.  Should they have been prosecuted?

What would their defence have been?  We actually did send in the appeal on time, but we couldn’t put our hands on it when you asked us?  A junior member of staff made a copy from our computer files but obviously they shouldn’t have done it and we’re very sorry, but that doesn’t alter the fact that we made the appeal in time and the dog ate our copy and why can’t you find YOUR copy, HMRC?  Is your filing system SO chaotic?

Say failing to make the appeal on time would have cost them £100.  Should they have been prosecuted for a measly hundred quid?  Would that have been worth the cost of prosecution in the first place?

Would the forged document even have been admissible as evidence?  We hadn’t had any conversations under PACE, they hadn’t had legal advice when they spoke to me, I hadn’t had any training in PACE except for the basic “this thing exists, you have to get it right, so refer to prosecutions if you think you’ve found something that needs this kind of handling” training.

It’s not as easy as it first sounds… except….

Well, except that obviously an overworked prosecution section has to prioritise.  Say they are so under resourced they can only take cases where there’s a million quid of tax at stake: would you even waste their time asking them about a forged document that £100 hangs on?

What should have happened, in an ideal world?

Well, shouldn’t there have been a prosecution unit attached to every team?  Resourced to investigate the smaller cases, under PACE, with a view to prosecution?  To prosecuting the tax cheats (and I mean the direct tax cheats, not the fag smugglers and VAT dodgers on the “most wanted” list) with the same kind of limits as the benefit cheats?

Instead of me arguing with them about their accounts and a district inspector shouting at them about the attempted forgery, maybe their accounts should have been examined with a view to prosecution and they should have been hauled in and interviewed under PACE.  It still might not have been a serious enough case to be worth prosecuting, but there’s a space between a hundred quid and a million where, surely, there ought to be some equivalence between the limits we set on benefit fraud and the ones we set on tax fraud?

Wouldn’t that bring in 25 times more than it would cost to run?  Why aren’t we doing that?

[Edited 14/2/15 because the headline should have read “evasion”, not “avoidance”.  Thank you, twitter! *beats head on desk*]

4 comments

  1. Sounds familiar, but with a few very rural twists.
    You are examining a set of accounts and the tax computation. You think there is a risk of cash sales because there is some evidence from the local Auction market. Say you were dealing with a dairy farmer, with some arable, hundreds of cows and before the animal tagging that now applies. There are some quirks in the law relating to how farmers are taxed (anyone recall farmers averaging?). The farmer is assessing using the herd basis. It is meant to isolate farmers from inflationary stock increases (http://www.crowther.co.uk/2011/03/tax-alert-herd-basis-explained/.)
    An enquiry starts and there is no sign of any “missing” cash, although you can’t fully reconcile the Animal Movements Records. You are checking the PN (Permanent Notes) and can’t find the election for herd basis. If missing, there are thousands of pounds of untaxed profits for a dozen years.The accountant is sure it was made and suggests the file is deficient but will supply a copy from their file.
    Copy duly arrives, and it is noted that it is made on a printed form that was not published at the date shown on the election. Accountant is challenged and admits, in front of client, they forgot to make a fresh election when the partnership changed after the farmer’s father had died. The election provided is false. Client stunned, sacks accountant, and pays hefty settlement.
    No evasion but because it was false documentation, done by an accountant, Enquiry Branch investigate them with a view to possible prosecution. Accountant forced to resign from their partnership, nothing of substance found by EB, so no prosecution.
    Was that the right decision? Would a prosecution have served as a deterrent?
    Another scenario is that there is no forged election but there is evidence of significant off-book cash sales of calves, extending over a dozen years. A civil settlement is reached, with a penalty of 35%. Was that the right decision? In the absence of full records how would you establish the true level of fraud in criminal proceedings? Would a prosecution have served as a deterrent?
    Or another scenario. There are significant expenses that turn out to be in cash and not supported by any third party invoices, just entries in the petty cash ledger. Farmer insists that they were for business expenses, mostly to other farmers for animals, but refuses to name anybody. Deductions disallowed and civil settlement is reached, with a penalty of 30%. Was that the right decision? Would a prosecution have served as a deterrent?

    These sorts of decisions have to be made ‘on the font-line’ by revenue authorities on a regular basis. They have to balance the resources available to them, cost:yield ratios of enquiries, the time taken to do things like examine records in detail, when to refer matters for more specialist investigation, the difference between proving in front of tribunals on the balance of probabilities against the higher criminal test of beyond all reasonable doubt.

    HMRC has had its resources steadily cut by the Coalition since 2010 (and earlier), although by less than most Departments. Some is down to new processes, digital and on-line but, to give HMRC credit, they have managed to redeploy staff into compliance, and (belatedly) increased their graduate recruitment programme. (See R17 in the 13/14 Annual Report, from 25,475 in March 2011 to 26,923 in March 2014.
    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/330670/HMRC-annual-report-2013-14.pdf.)
    But high end avoidance and evasion requires more than just numbers, tackling complex structures needs experienced and professionally skilled staff. (See Fig 12 in http://www.nao.org.uk/wp-content/uploads/2014/03/Tax-reliefs.pdf). There are reports from within HMRC that they are finding it hard to recruit and retain specialist staff – no real surprise given the extended pay freeze imposed by the Coalition.
    If there is now a demand to prosecute (and even litigate) more cases then this will simply add to the already high pressures on the Tribunals and Solicitors services. As has been noted “27,246 cases were waiting to be heard in the Tax tribunal in the year ended 31 March 2014. This is an increase on the 26,965 cases outstanding at 31 March 2013 and more than double the 13,456 outstanding at 31 March 2010. 267 new Upper Tribunal cases were lodged in the last year, an increase of 32% on the previous year, and almost four times as many as five years ago, when 70 new cases were lodged with the Upper Tribunal.
    In an effort to ensure that tax cases are heard faster, the Judicial Appointments Commission is currently recruiting up to four salaried judges and up to 35 fee-paid judges and deputy judges for the First Tier Tax Tribunals.” (http://www.out-law.com/en/articles/2014/november/tax-tribunal-backlog-reaches-record-high/)

    It may be that the current balance of civil settlements, litigation and prosecution is lopsided, and very tempting to look for more prosecution and more ligation. Clearly, there might be scope for more use of Magistrates Courts (e.g. “common law cheat”), but I think it unrealistic to prosecute every farmer, plumber or doctor with unrecorded cash sales. Further, currently HMRC probably does not have the skilled staff to implement such a significant rebalancing and that the Courts would probably not be able to cope either. Even if it were done, there is always the risk that legal action fails (Harry Redknapp anyone?), so it is not necessarily a panacea.
    But, over and above all that, I suspect it will not satisfy those people and groups who have lost trust in the ability and desire of HMRC to collect all the taxes owing. They cannot see the full facts in each case and satisfy themselves the “right” decision was made. When there are enquiries, such as Andrew Park’s, that give HMRC a relatively clean bill of health, the findings are disputed and their suspicions not assuaged. Dealing with that sort of mistrust is, I think, not going to be solved by announcing some more prosecutions.


    • Interesting, Iain, but I don’t suggest prosecuting “every farmer, plumber or doctor with unrecorded cash sales”. What I *do* suggest is investigating under PACE with a view to prosecution anyone where there is prima facie evidence of wrongdoing and an amount at stake comparable to the amount for which you’d prosecute a benefit fraud.


  2. “Or another scenario. There are significant expenses that turn out to be in cash and not supported by any third party invoices, just entries in the petty cash ledger. Farmer insists that they were for business expenses, mostly to other farmers for animals, but refuses to name anybody. Deductions disallowed and civil settlement is reached, with a penalty of 30%. Was that the right decision? Would a prosecution have served as a deterrent?”

    Yes, it would act as a deterrent, unfortunately.


  3. In 2005 when HMRC came into existence the full extent of the scale of tax schemes was not really known. But the new culture of challenge every scheme and never surrender was never going to be without risk. As HMRC began a campaign of publicising its work it had to do more and more simply to be seen to be moving forward. The headlines suggest that the UK is a nation of tax evaders and fax avoiders and in my experience we are much better or at least no worse than most of our competitors.

    Tax evasion and tax avoidance is and has for all time been a fact of life and there will always be some who will try it on or just cheat. Tax evasion is a crime but we need to allow HMRC more freedom to deal with low value cases of avoidance and evasion in as quick a manner as possible. Treating the large cases as seriously as the small is a recipie for disaster which is where we have ended up. Prosecution is not the answer, increased or guaranteed detection is and it us that that should be the direction.

    There may be a case for increasing prosecutions to shock the market into a realisation that HMRC are serious and all of the radical changes to tax avoidance are likely to bring much of that gravy train to a halt. But the biggest danger is to HMRC, the leadership have made mistakes but much of the criticism is in relation to issues that the previous management were responsible for and in reality the current management have been caught up in a situation that they are not equipped to handle. There are too many critics who spout simplistic solutions but typically they have no or very limited experience of what it is like to try to manage the huge challenge of restoring trust in the UK tax system.

    HMRC has in many ways made life difficult for itself by promoting strategies that most experienced Inspectors could see were flawed. The tough approach on penalties and other changes simply heaped more work on a department already struggling with its workload. When you factor in that parts of the tax system are incomprehensible then error and delays become inevitable. Taxpayers who have “sinned” should be encouraged to come forward, not by amnesties but by certainty of treatment, tax avoiders should be able to give in on reasonable terms without the pain of finding an “LSS compliant settlement” which most of the time is just a fudge. The time and HMRC resource currently wasted on chasing the very many could be redeployed on tackling the hardened few who are determined not to pay at all.

    The longer we leave it the more difficult it will be to clean up the “battlefield” and it may already be too late. The old Inland Revenue had a culture of tolerance of low level tax evasion, thousands of cases being dealt with every year with increased tax and penalties, self assessment increased the avoidance and evasion risks and the Revenue approach to both did not keep pace and now we are where we are. But I for one do not believe that the problem is as bad as the headlines would have you believe but HMRC must free its people from the manacles that the drive for “consistency” and the “central bunker” mentality has placed upon them and get back to being able clear small cases quickly. Recently a senior member of HMRC told me that “things were much tighter than in your day”. It did make me laugh!



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