Good cop, bad cop: HMRC strengthens fraud investigation

ENCOURAGING A TAXPAYER to come clean about a suspected tax fraud by guaranteeing that he or she will not face criminal prosecution can save the taxman time and money.

Problems can occur, however, if a taxpayer who has committed fraud reneges on their side of the bargain and doesn’t co-operate with tax investigators.

If HM Revenue and Customs (HMRC) has begun a civil investigation into suspected tax fraud under current guidelines – known as “Code of Practice 9” – investigators cannot switch to a criminal prosecution if the taxpayer doesn’t fess up.

HMRC’s only option when a suspect withdraws is to charge higher penalties for any tax irregularities uncovered. Currently, HMRC cannot withdraw from the civil investigation unless a materially false statement has been made or materially false documents have been provided to create a new offence to tackle.

In complex cases, which can take a couple of years or more, the only way to verify a fraudulent tax position without the taxpayer’s assistance may be through third parties, such as a bank, adding to the expense and length of the investigation.

Later this month HMRC – which hopes to collect an additional £7bn of tax revenues a year by 2014/2015 by targeting tax avoiders and tax evaders – will introduce tougher procedures for civil investigations into suspected cases of serious tax fraud.

From 31 January, HMRC will write to taxpayers suspected of serious tax fraud, offering them the opportunity to enter into a contract – a “Contractual Disclosure Facility” – to disclose any fraud within 60 days.

In return, HMRC will agree not to criminally investigate, removing the risk of prosecution by HMRC. The investigation will then be carried out using civil powers, with a view to a civil settlement for tax, interest and a financial penalty of up to 200% of tax owed.

Taxpayers who choose not to co-operate will face a full investigation by HMRC – in some cases a criminal investigation with a view to prosecution. Anyone who signs the contract, but does not go on to admit and disclose fraud, will also face the possibility of a criminal investigation.

HMRC will undertake hundreds of Code of Practice 9 investigations each year for cases where criminal investigation is not considered the most cost effective way to tackle the fraud, or for situations where a prosecution is unlikely to be in the public interest.

Changes to civil investigations into suspected tax fraud were proposed in a summer consultation. Procedures for civil fraud investigations were agreed in 2005 following the merger between Inland Revenue and HM Customs and Excise.

In 2009/2010 HMRC’s “civil investigation directorates” generated additional tax of £8.5 billion from compliance work — an increase of 49% per cent in real terms since 2007-08, according to a report by the National Audit Office published in December 2010.

The NAO report praised the amount of tax secured by HMRC’s civil fraud investigations but said that they could be done more effectively.
Criminal fraud investigations are often complex and involve detailed examination of a person’s tax affairs.

In 2009-10, civil fraud investigations took an average of 25 months, compared to an internal target of 18 months, the NAO report also said.