HMRC: Not quite get out of jail free

LAST YEAR we were told of HM Revenue & Customs’ intention to clampdown on “morally indefensible tax evasion”.

We were promised that HMRC would receive an extra £900m in financial support for its pursuit of tax evaders, that there would be a five-fold increase in criminal prosecutions and that successful investigations and prosecutions could raise up to £7bn a year by 2015 (HMRC Annual Report and Accounts 2010/2011).

Now that HMRC has the tools, the finance and the impetus, the clampdown must be imminent. Many of the new changes are not directed towards tax evasion by corporate bodies but by individuals and so it is from them that some of the £7bn a year is expected to flow.

On 13 October 2011, HMRC announced that it would shortly be writing to 500 UK residents and organisations that hold HSBC Geneva bank accounts. Individuals be warned, once you receive such a letter you may be barred from other disclosure facilities and so excluded from their more beneficial penalty and interest rates.

Those who receive a letter after 1 January 2011 may be invited to enter the new Contractual Disclosure Facility (CDF), which replaces the current Code of Practice 9 (COP9) procedure and which includes greater powers for HMRC to refer cases for criminal prosecution.

HMRC has targeted particular groups over the past few years, including medical professionals and plumbers, and they have further plans to target private tutors, trade persons (electricians etc) and e-market place traders. However, despite the apparent arrest of a few plumbers, the majority of those investigated will have their cases settled civilly and usually via the COP9 procedure.

COP9 has been criticised as a soft-touch option, in which the individual, even before any negotiations for civil settlement of the outstanding taxes take place, is offered immunity from criminal prosecution for all previous tax fraud offences. What then, argue the critics, is the incentive for the taxpayer to settle the outstanding tax, penalty and interest with any urgency?

HMRC’s consultation on the new CDF closed in September and the final policy is yet to be published. However, from talks with HMRC, it appears that under the CDF an individual will be offered a contract whereby, if they disclose their fraudulent tax offences, they will be immune from criminal prosecution for those tax offences.

Of course, any tax offences which are not disclosed will not be covered by the immunity within the contract. It was hotly debated during the consultation whether taxpayers participating in the CDF would have to admit deliberately and dishonestly evading payments of tax (i.e. fraud).

Such an admission may significantly impact on individuals who have duties of disclosure to a professional or sectoral regulator.

Explicit recognition and acceptance of the fraud (within the 60-day window for Outline Disclosure) may be too great a hurdle for some. Practitioners have called for a more palatable admission requirement, with fraud being replaced with an acceptance that HMRC may eventually view the taxpayer’s behaviour as fraudulent.

The introduction of the new CDF, with HMRC’s greater powers to criminally prosecute individuals and its stricter timeframes, highlights the taxpayers’ need to obtain specialised advice as soon as possible.

Another debate between practitioners and the HMRC is whether the meeting between the taxpayer and HMRC, which forms part of the CDF process, will require the taxpayer to be formally cautioned, as is the regular practice in police station interviews.

With the increased risk of criminal prosecution taxpayers may also be cautious of providing information to their accountants, who do not benefit from the client privilege that lawyers provide.

When COP9 is replaced on 1 January 2011, the automatic immunity for all former tax fraud offences under COP9 will be removed, albeit not retrospectively. The state will acquire greater powers of prosecution for taxpayers who do not adequately engage with them. These stricter powers for HMRC will be compounded, for the taxpayer, by the Swiss/UK Treaty – the full text was published by HMRC in October 2011.

While the Swiss banks are preserving some of their confidentiality and can pay some outstanding taxes to HMRC without revealing the name of their customers, failure of UK taxpayers to engage with the process could lead to the Swiss banks disclosing their details to HMRC.

Those who try to move their monies from Switzerland to more ‘friendly’ jurisdictions may find their funds being followed, as the Swiss will notify HMRC of the ten locations to which the largest volume of funds are transferred and the number of relevant persons that have transferred their assets to each location.

HMRC has promised a five-fold increase in criminal prosecutions for tax evasion. Individuals should be aware that they are now at much greater risk of criminal prosecution and, come next year, HMRC will have even greater powers to pursue individuals believed to have fraudulently evaded taxes.

Rachel Cook is an associate at Peters & Peters Solicitors LLP

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