The Enforcers

‘Go ahead, make my day.’ It’s a familiar image – Clint Eastwood as the world-weary American cop who dares the errant citizen to go that one step further to instant termination.

What’s scary is that any practitioner who has ever advised a client in a tax investigation may well recognise some similarities with scenes played out for real in tax offices across the country.

Inspectors summon people to meetings to discuss their affairs, then challenge them to disclose information which the Inland Revenue already has. If the explanations don’t tally with the ‘facts’ as the inspector sees them, then it’s Russian roulette. Is the client telling the truth? Has the inspector got it wrong? If not, what’ll the Revenue do?

Thankfully, even when errant clients are less than truthful about their tax affairs and the Revenue can prove they’ve underdeclared their liability, in the vast majority of cases the investigation proceeds to a monetary settlement. Though this will include a substantial penalty for lack of disclosure, and possibly even co-operation, it’s a lot less painful than Dirty Harry’s method.

But what about serious fraud, the type of case that until the late 1980s, when it merged with Special Office and Board Investigation Office to form Special Compliance, was handled by Enquiry Branch and occasionally led to criminal prosecution? Unfortunately, for taxpayers and practitioners alike – for differing reasons – the change here is a big one.

Invariably, Enquiry Branch only worked to criminal prosecution those cases targeted as such from the outset. Now that Special Compliance Office has established itself both internally and in the public eye, it’s approach is much more robust. As a result, the number of prosecutions in cases where immunity has been offered in return for a full confession but the taxpayer has still failed to come clean – the type worked under the Revenue’s Hansard Policy – is rising.

But why is this? Except for a restatement in 1994 of the Policy into plainer English (some would argue still not plain enough), little has changed in the way it operates: the taxpayer is still invited to make a fully quantified confession of all irregularities in his tax affairs with the threat that, should he fail to do so, criminal prosecution proceedings will be instigated.

The old Enquiry Branch dealt with thousands of cases over many years under the original 1944 version of the Hansard Policy and its recent revision and this is still the role of the Hansard Groups in Special Compliance Office. But changes in the department’s internal structure means that to avoid criminal prosecution proceedings it is now more important than ever before that the taxpayer and his professional adviser deliver a full confession at the earliest opportunity.

Revenue has the resources

The Revenue is better resourced now than at any time in the past to undertake a criminal prosecution whether a case starts out with that aim or in the event of a partial confession being made in an investigation worked under Hansard. Secondly, there’s an unprecedented wealth of expertise in the department: it has held onto many of the inspectors and accountants who worked on the Pigott, Dodd and Nissan cases to name but three. They bring to each criminal investigation not only wide experience but also a supreme confidence in their ability to get it to full trial. Furthermore, the courts view

as a very serious crime and are handing down to guilty taxpayers much heavier sentences now than in the past.

Two contrasting cases will perhaps put these comments into context and illustrate the changing attitude of the courts to tax evasion in recent years. In 1990, a company director received a six-month custodial sentence for passing false invoices to the value of z250,000 through his company’s accounts. In 1996, a businessman received a two-and-a-half year custodial sentence for failing to make a full confession under the Hansard Policy; the amount involved was z50,000.

The Enquiry Branch in the past

Before the Revenue restructured, Enquiry Branch dealt with the investigation of known or suspected serious tax irregularities and was one of only two departments (the other being Board Investigation Office) able to undertake criminal prosecutions. Typically, it would have comprised seven fully-trained inspectors and three qualified accountants whose roles, among others, were to investigate both serious fraud in businesses and the standards of dishonest or incompetent tax advisors. While a tiny number of cases – possibly three or four each year in a provincial office, more in London – would have been worked to criminal prosecution from the outset, the vast majority involving taxpayers would be dealt with under the Hansard Policy. The Revenue always refused to be drawn into commenting on what the Policy actually meant in practice. Experienced tax investigation specialists, however, knew that if a taxpayer commissioned and formally adopted an independently produced report that fully disclosed all irregularities then the Revenue would invariably seek a monetary settlement. To do otherwise would have diminished the threat Hansard provided because taxpayers would hardly be inclined to go to the time and expense of commissioning a report if they couldn’t be reasonably certain it would get them out of criminal proceedings.

Even in the event of a less than full confession, it was highly unlikely Enquiry Branch would have been able to carry out the implied threat of the Hansard Policy and prosecute. Enquiry Branch rarely had the manpower even to cope with those cases always intended for criminal prosecution.

So except in the most blatant cases where the Revenue had little choice but to institute proceedings, investigations in which a taxpayer made a less than frank confession under the Hansard Policy would still proceed to monetary settlement but with high penalties for non-disclosure.

But times have changed. Apart from those cases worked to criminal standards from the outset – nine new ones arising from s20C TMA70 search operations in London alone in the first half of 1996 – the Revenue now has for the first time in a number of years the resources properly to carry out the threat implicit in the Hansard Policy.

Today, apart from the Hansard Group, the typical provincial Special Compliance Office can have as many as three separate dedicated prosecution groups – again more in London – comprising 20 inspectors or accountants supported by colleagues from the former Board Investigation Office already well-experienced as former members of the other Revenue department able to go to court.

Before, the experience gained among members of Enquiry Branch in criminal work quickly dispersed as inspectors who’d been involved in such cases moved on after their six-year ‘tour of duty’ to other Revenue departments.

New recruits handling their first criminal investigation had to repeat the learning curve their predecessors had been through only a few years earlier. Again, the implementation of the Revenue’s new office structure has changed all that. Some staff with more than ten years’ know-how are staying on to head the various sub-groups in Special Compliance Office, passing on their wisdom and confidence in criminal prosecutions to newer colleagues.

So how can the professional adviser, possibly lacking experience in in-depth tax investigations, ensure as far as possible a report he’s instructed to prepare under the Hansard Policy contains a full confession so that his client avoids criminal prosecution?

Most importantly, he must expect the unexpected. It may, in theory, be reasonable to assume a client will always make a full disclosure to his adviser and co-operate by supplying all relevant facts and information at the earliest opportunity so a comprehensive report can be produced within the tight deadlines the Revenue usually imposes in such cases.

In practice, this doesn’t always happen. The client may not realise it is his and not the adviser’s responsibility to ensure the report is full and complete. Indeed, some expect to have to little input in the preparation.

So, right from the start, the adviser must continually emphasise that though the report is very much a team effort, producing it at all is still wholly reliant on the client’s ability to deliver and disclose information as and when it is required.

Secondly, never underestimate the size of the task and its impact on the smooth running of the rest of the adviser’s practice. Any good Hansard report cannot consist of information provided solely by the client. Wherever possible, facts should be independently verified to give them further credibility. This alone takes time to collate.

Scepticism and cynicism

Try to put yourself in the inspector’s position. View all information and explanations with a modicum of scepticism and cynicism. After all, if the client can convince an adviser in that frame of mind that he’s telling the truth then he is more likely to be able to convince the inspector.

Implied distrust can be difficult to put in practice, though, especially if the professional adviser has been acting for the client for many years.

You have to maintain a balance between obtaining the relevant information and exercising care so as not to upset future relationships.

Think laterally because the inspector is certainly going to when he reviews the report. Try to anticipate what enquiries he might make and make sure you’re there before him. Reporting the findings of research like this and the subsequent resolution of anything unexpected will undoubtedly make the inspector more likely to accept the bona fides of work done in preparing the report and persuade him no further investigation is needed in that area. This approach will not only forestall any suspicion of lack of disclosure but will also act as a considerable bonus in negotiations on penalties in a monetary settlement.

Investigations of this kind invariably mean the adviser has to delve back into the books and records for the businesses and individuals under investigation. It’s inevitable that the very records he needs to inspect to wrap up one part of the investigation will have gone missing, been destroyed, or simply thrown away some time ago. But There’s always more than one way to prove a point if not with direct then circumstantial evidence or hearsay. Remember: the inspector has to work with the same information as the adviser, but this doesn’t mean you should destroy records on purpose.

A large bonfire on the first day of the investigation can hardly fail to arouse suspicion.

If the adviser has been acting for the client in accountancy, tax and other matters for a number of years, particularly during the period subject to investigation, then he should critically review his own work to ensure it meets the standards the Revenue expects from any competent professional adviser. Because Special Compliance Office’s own accountants are certainly going to during the course of the investigation.

These are a few points the careful adviser should bear in mind when preparing reports under the Hansard Policy to ensure clients that a full confession is made. From now on, another well known film-phrase seems appropriate to professional advisers instructed in such matters.

Let’s be careful out there.

Barry Draper is a senior manager in the Tax Investigations Group of Moores Rowland.

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Tax-free exemption to departing employees ended by gradual change in Revenue practice from the early 1990s. Revenue’s estimated cost was z1bn.

Withdrawal of tax exemption on underwriting commission received by charities introduced in April. The commission, usually about 2%, was moved from charity exemption to trading income status.

End to VAT zero-rating on staff advertisements placed by charities in June. Annual recoup estimated at z1m.

Executive share option schemes severely limited in April’s Finance Act.

Clampdown on use of non-resident companies to avoid UK Capital Gains Tax in April’s Finance Act. Revenue claimed z30m annual loss.

Restriction on use of controlled foreign companies to avoid UK corporation tax. Designed to cut annual Revenue loss of z100m.

Tightening of use of VAT groups to over-recover VAT confirmed in April’s Finance Act.

Transfer pricing loophole shut in August last year. Legislation used to strengthen Revenue’s ability to adjust companies’ profits after a transfer pricing inquiry.

Off-setting of friendly society management expenses stopped by retrospective legislation in May 1995 preventing a z60m liability for the Government.

Many societies, involved in both tax-exempt and taxable insurance, offset all management expenses against income and life assurance business.

Avoidance of input tax on new company cars halted in April 1995’s Finance Act after Thorn EMI’s tribunal victory over Customs & Excise in January 1995.

VAT Statement of Practice issued in July this year to combat ‘unacceptable avoidance’, restricting changes that can be made to VAT groups, while giving Customs considerable power to restrict and control taxpayers’ actions.

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Companies have tried to claim the relief for unrelated groups which continue to hold North Sea license interests.

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