Handling tax fraud investigations

THERE HAS been much talk in the media and amongst politicians in recent months about tax avoidance and tax evasion. The vital distinction between the two is that tax avoidance is the lawful arrangement of one’s affairs so as to reduce or avoid a liability to tax which might otherwise arise. Tax evasion is unlawful. Historically, accountants have tended to deal with HMRC on civil matters. However, the recent announcement by the chief secretary to the Treasury that £900m will be made available to HMRC to reduce non-compliance in the tax system and fund an intended five-fold increase in criminal prosecutions, will mean that more taxpayers and their advisers will find themselves at the sharp end of an investigation for tax evasion.

Who investigates and prosecutes tax fraud?
HMRC is responsible for investigating suspected crime involving all of the taxes and other regimes it is responsible for. It does not, however, decide whether a criminal prosecution is to be commenced. The decision whether to bring a criminal prosecution is made by an independent prosecuting authority. In England and Wales this was, until recently, the Revenue and Customs Prosecutions Office (RCPO). However, in January 2010, the RCPO merged with the Crown Prosecution Service (CPS) and tax prosecutions are now carried out by the Central Fraud Group of the CPS.

How criminal tax proceedings might start

Typically, a tax prosecution will begin with an unannounced search of premises and seizure of evidence (more commonly referred to as ‘dawn raids’ as they usually start early in the morning).
Using powers under the Police and Criminal Evidence Act 1984 (PACE) HMRC may:

  • Enter and search premises (section 8 and Schedule 1 of PACE).
  • Require production of documents (section 8 and Schedule 1 of PACE).
  • Seize items such as computers (sections 8 and 19 of PACE and also section 50 and Schedule 1, Criminal Justice and Police Act 2001).
  • Arrest persons (sections 17 and 24(2) of PACE).

What might happen next

Often there will be a lengthy period after the raid during which time HMRC will examine the documentation and other materials which they have removed. Many issues will arise during this period, the most pressing of which will be giving the affected person access to the material that has been seized – sometimes HMRC investigators will be reluctant to allow this. Having examined the seized material, HMRC will then decide whether the matter should be passed to the CPS with a view to criminal charges being brought against the suspected offender. On occasion, if HMRC are concerned that a suspected offender may leave the UK, perhaps because he is domiciled abroad, he will be arrested and appropriate bail conditions set.

All defendants aged 18 or over who are charged with a criminal offence will make their first appearance before the Magistrates Court. In most cases of serious fraud relating to tax the charge will be an ‘indictable’ offence, i.e. to be heard in the Crown Court, and the case will be sent there by the magistrates.

Prior to trial the CPS is required to serve on the defendant all the evidence it will produce to prove the defendant’s guilt. The defendant’s legal team must then serve a statement, usually referred to as a defence case statement, setting out the nature of the defence and the matters of fact on which the defendant takes issue with the prosecution.

In cases of serious fraud the court may also hold preliminary hearings to identify important issues for the jury and generally to help the Judge’s management of the trial.

At trial the jury will be sworn in. Prosecuting counsel will give an opening speech and will then call the prosecution witnesses who will give evidence and then be cross-examined. If there are any disputes as to points of law or arguments as to the admissibility of evidence a separate trial within a trial (known as a ‘voir dire’) will take place in the absence of the jury. The judge will make a decision once he has heard from counsel and any relevant witnesses.

At the end of the prosecution case, defence counsel will present the defendant’s case. If he is calling witnesses he will make an opening speech to the jury first and then call witnesses on behalf of the defence to give evidence. They will then be cross-examined by prosecuting counsel and then if necessary re-examined by defence counsel.

At the conclusion of the defence case, both prosecuting and defence Counsel will deliver a closing speech to the jury and the Judge will then sum up the issues of fact and law for the jury. Finally, the jury retire to consider their verdict. They must decide their verdict unanimously although the judge will accept a majority verdict of 11:1 or 10:2 if unanimity is not possible after a period of time.


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The aggrieved taxpayer
In the vast majority of cases following a raid, the suspect will be interviewed under caution at a police station (he may also be under arrest at the time of interview which means a photograph will be taken together with fingerprints and a DNA sample). However, sometimes months or even years later, HMRC may decide not to proceed further. In addition to the stress and anxiety caused by the raid, the taxpayer may suffer damage to his reputation. In extreme cases, where the raid is against professional advisors, it can result in the loss of their business as clients depart and third parties, such as banks and/or suppliers, withdraw their support. In such circumstances, does an aggrieved person have an effective legal remedy available to him?

The first step might be a complaint to the adjudicator. Although sometimes viewed as powerless, in 2009/10 the adjudicator upheld 44% of complaints against HMRC and ordered HMRC to pay in excess of £100,000 in compensation to aggrieved taxpayers.

However, in some cases a taxpayer may feel that even after he has involved the adjudicator he has still not been given a satisfactory explanation (or recompense) for the action HMRC has taken against him. In those cases he may prefer to involve the courts and, bring an action against HMRC.

It may under certain circumstances be possible to bring proceedings for misfeasance in public office. An example of such behaviour might include HMRC targeting a class of taxpayers, for example promoters of tax mitigation structures, simply because HMRC object to such structures and wish to put those who promote tax mitigation structures out of business or at the very least cause them a great deal of commercial disruption. In other contexts the courts have awarded aggravated damages where it has been established that a government department ignored procedural safeguards and acted with bad faith. One of the unusual features of this tort is that it is possible to claim damages for pure economic loss, such as the disruption to business that a raid will inevitably cause.

Misfeasance by HMRC officers will, happily, be a rarity and few taxpayers will wish to commence litigation. However, in those rare cases where HMRC have acted unlawfully, it will be a comfort to the aggrieved taxpayer that there are effective legal remedies which can be deployed to assist him.

Jonathan Levy and Adam Craggs are partners at Reynolds Porter Chamberlain LLP and are former HMRC prosecutors.


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