Government pressure driving HMRC's scatter gun approach to criminal investigations

Governmental pressure to crack down on tax evasion is resulting in HMRC applying its criminal investigation policy in an inconsistent manner, writes Kingsley Napley’s David Sleight

THE disclosure of the Panama Papers sent the government into a spin.  Shock and awe tactics included the announcement of new regulations, greater transparency and even a corporate criminal offence of failure to prevent tax evasion.  The fact that the majority of these new initiatives had already been introduced last year did not seem to matter. The message was clear: “The UK is taking the lead in the fight against global tax evasion.”

One story that couldn’t be spun is the Public Accounts Committee (PAC) report published on 15 April which provided a damning indictment of HMRC’s record in recouping the billions of pounds lost from “tax fraud” in the UK each year.  The PAC reported a deficit of “£16bn of uncollected tax” and lamented the limited progress made in reducing that level which is purported to be around 3% of all tax liabilities per year.

A number of specific criticisms were levelled at HMRC including the “woefully inadequate” numbers of prosecutions for off-shore evasion and “confusing performance reports based on poor data”.  Indeed, it may seem odd that official HMRC sources report that “HMRC has increased the number of prosecutions of tax evaders from 545  in 2011 to 1,288 by 2015, resulting in 407 years of custodial sentences”, whereas the PAC reports significant tax losses over the same period of time.

However, assuming that the HMRC have not been massaging their own figures, the apparent contradiction may be explained by the way that the HMRC criminal investigation policy is currently being pursued. There are growing concerns from those who defend HMRC prosecutions that the governmental pressure to crack down on tax evasion is resulting in HMRC applying its criminal investigation policy in an inconsistent manner.  Cases that would previously have been deemed ‘civil’ in nature are now being pursued as criminal investigations, despite the fact that they generally take longer, are more resource intensive and do not guarantee any financial return at their conclusion.

The PAC alleges that there is “an impression that the rich can get away with tax fraud”, while HMRC pledges to prosecute “100 wealthy corporates and individuals” by 2020.  This somewhat random target further optimises HMRC’s scatter gun approach.  The pursuit of big ticket prosecutions against corporates and professional “enablers” creates great headlines, but ignores practical and financial realities.  Spending time and resources prosecuting cases criminally that previously would have been dealt with under the civil regime is not cost effective and is arguably counterproductive.

Likewise the introduction of the new corporate offence of failure to prevent tax evasion may have superficial attractions (e.g. holding a company to account for the actions of its “associated persons” abroad) but it fails to recognise the complexities of tax regulations and legislation in other jurisdictions. For UK companies working in such jurisdictions this will require an additional layer of compliance that will arguably put them at a commercial disadvantage to those operating locally.  More importantly, one has to consider whether such investigations are really going to assist the UK in plugging the tax deficit reported by the PAC. Why should the UK be spending significant resources in enforcing the laws of foreign jurisdictions with respect to the tax which is ultimately payable in that jurisdiction?

One thing is for sure – in the government’s fight against global tax evasion there are going to be unsuspecting casualties. Professional advisers would do well to ensure that they are not caught in the cross fire.

David Sleight is a partner at law firm Kingsley Napley, who specialises in defending both companies and individuals facing investigation and action by HMRC