HMRC refer cases internally when they become aware that tax fraud has been committed, or have a suspicion that it has. The first consideration is whether the case is one that is suitable for criminal investigation, in accordance with HMRC’s policy, see below. Key influencing factors will include the nature of the alleged offence, the profile of the taxpayer, and consideration as to whether prosecution is in the public interest. The amount involved is not a material factor. Where, for whatever reason, the case is not pursued along criminal lines, the taxpayer will, usually, be contacted under the Contractual Disclosure Facility, HMRC’s civil fraud investigation process, commented on below.
HMRC’s criminal investigation policy is contained in a published document, available via their website www.hmrc.gov.uk/prosecutions/crim-inv-policy.htm. The policy sets out the circumstances in which HMRC will generally pursue a criminal investigation rather than one under its civil code. HMRC’s officers usually conduct the criminal investigation, although HMRC are not a prosecuting authority. Prosecutions for offences that fall under HMRC’s remit are conducted by the Crown Prosecution Service in England and Wales, the Crown Office and Procurator Fiscal Service in Scotland, and the Public Prosecution Service Northern Ireland in that jurisdiction.
HMRC’s approach is to deal with cases of suspected fraud by use of the Contractual Disclosure Facility (CDF), (conducted in accordance with Code of Practice 9) wherever possible. Criminal investigation is reserved for cases where the conduct involved is such that only a criminal sanction is appropriate, or where HMRC considers that it needs to send a strong deterrent message. HMRC reserve discretion to conduct a criminal investigation in any case, and the aim is to conduct these investigations across a range of offences and in the various areas for which they have responsibility. The target for prosecutions has increased significantly in recent years, and HMRC are under considerable pressure to achieve the relevant numbers.
The circumstances in which HMRC will generally pursue a criminal investigation include the following:
- Where an individual holds a position of trust or responsibility (this includes an accountant or solicitor);
- Where materially false statements are made or materially false documents are provided in the course of a civil investigation;
- Where, pursuing an avoidance scheme, reliance is placed on a false or altered document or such reliance or material facts are misrepresented to enhance the credibility of a scheme; and
- Where deliberate concealment, deception, conspiracy or corruption is suspected.
The policy also highlights certain fiscal offences where HMRC will not usually adopt the civil procedures under Code of Practice 9, mentioned above. The examples given are:
- VAT ‘bogus’ registration repayment fraud; and
- Organised Tax Credit fraud.
The first that a taxpayer may know that HMRC are pursuing criminal proceedings against him is when he is subject to a “dawn raid”. That is when HMRC officers and, often, police officers, turn up at his home early in the morning to execute a search warrant. The taxpayer will usually be arrested, as will any others suspected of being involved, and removed to a local police station for questioning later in the day. The property and, potentially, persons on those premises, will be searched in the pursuit of evidence. The search is an invasive and intrusive experience, and one that is likely to be distressing for any family members present. There may be simultaneous raids on other premises, including those used for business, and those of professional advisers.
Alternatively, the taxpayer may receive an invitation to attend an interview under caution. This may follow a local office enquiry, other action by HMRC, or a letter may be received directly from HMRC’s Criminal Investigation division without any previous indication of HMRC interest in the taxpayer. On receipt of such a letter, or in the event of a raid, specialist advice and assistance should be sought immediately.
The civil investigation process
Investigations under HMRC’s civil fraud investigation process, the Contractual Disclosure Facility, are conducted by officers in HMRC’s Specialist Investigations, or their Local Compliance Fraud teams. Under the process, taxpayers suspected of fraud are invited to enter a contractual arrangement with HMRC. The taxpayer is given an assurance that he will not be prosecuted for tax offences, providing he meets certain criteria, including making what amounts to an admission of fraud. Taxpayers are required to give HMRC an outline of the tax irregularities within 60 days, before, usually, submitting substantive details of the “fraud” within a further period of time.
The process is fraught with risk and potential pitfalls, even where the taxpayer wishes to co-operate with HMRC. Specialist advice should be taken. I have acted for many clients where they had relied on their normal adviser, but who did not have the relevant experience, and only sought specialist advice at a late stage in the process. Disastrous consequences have included the taxpayer unnecessarily facing the risk of criminal action by HMRC, and the taxpayer potentially paying a significantly higher penalty than would otherwise be the case. Many advisers recognise the need for specialist advice when a client is faced with an accusation of fraud, and will recommend that course of action to them.
HMRC considers that the Contractual Disclosure Facility is compliant with the Human Rights Act 1998, although that has not been tested in the courts.
Voluntary admissions of fraud
I have seen numerous instances where a taxpayer has committed fraud, and wants to regularise their tax affairs before they are contacted by HMRC. This is a situation that needs careful handling, and specialist advice. There can be a tendency for the adviser to contact the “local” tax office with details of the fraud. The danger here is that the initiative is lost, and the decision on how to proceed will lay with HMRC. Where the taxpayer makes a complete and unprompted disclosure of the offences committed it is unlikely, in practice, that HMRC will pursue a criminal investigation. There cannot be any guarantees, and there must be an objective appraisal of the taxpayer’s position.
There are, usually, several options available, and each must be considered. There is, currently, one option with significantly preferable terms over the other routes to voluntary disclosure. That option is the Liechtenstein Disclosure Facility, which is available until 31 December 2015. The Liechtenstein Disclosure Facility provides various tangible benefits in most circumstances. Once that process closes its doors the position for those with voluntary disclosures to make will be less certain. Taxpayers with irregularities to resolve are encouraged to address them while the Liechtenstein Disclosure Facility is still available. It is worth remembering that taxpayers will never know what information HMRC holds about them, and if, or when, they will get a letter, or, worse still, a visit, from the inspector.
Examples of fraud
As noted earlier, there is not a statutory definition of tax fraud. Failing to notify HMRC that you have commenced self-employment may be construed as tax fraud, and dealt with in accordance with the above principles. Although HMRC are unlikely to commence a criminal investigation where a taxpayer fails to register after a year of trading, if the failure continues for several years, they may view the taxpayer as acting fraudulently.
A businessman asking a customer to leave the payee details on a cheque blank may be deemed to be fraud, particularly where that cheque is used to pay a third party. Similarly, describing funds from overseas as a “loan” when they are from undeclared income may be treated in the same way.
A common scenario is where a company director has used their business to pay for an extension or other significant work on their home, or private expenditure generally. That is perfectly acceptable, and legal, providing the correct accounting treatment has been followed. Where the expenditure is hidden in the accounts, HMRC may treat the case as one involving fraud.
Final words of advice
Whether HMRC pursue a case of suspected fraud using its criminal powers or the civil fraud investigation process will depend on the particular circumstances. Whichever route HMRC chooses, it uses specialist officers. Most advisers, whether accountants or solicitors, do not encounter cases of fraud on a regular basis, if at all. Taxpayers suspected of fraud, or who wish to make a voluntary declaration of fraud, should seek specialist advice at the earliest opportunity. Failing to do so can have disastrous consequences. At Berwick Law we have the necessary expertise to guide you through the process of a HMRC investigation, or of making a voluntary disclosure.