Accountancy Age analysis - Revenue reputation for clear-up falters

The news followed another shock revelation that the Revenue is spending £1 for every 30p it recovers when it investigates suspected tax evasion by the self-employed. The revelations were made by a former inspector now working in tax investigations at a mid-tier firm.

According to our analysis of the prosecutions pursued in the year to 1999, the Revenue may have achieved a success rate as low as 16%.

The news emerged as the Revenue began digesting responses to its proposed increased powers to combat serious tax fraud.

The revelations have already sparked debate over whether boosting the Revenue’s powers is necessary or desirable when its prosecution record is so poor.

Our analysis showed the Revenue sought prosecutions in external cases against 44 people, of which 24 were convicted – a success rate of 55%.

But if those cases where the accused pleaded guilty are excluded the success rate is much worse. From the Revenue’s own figures, of the 24 people convicted, 11 pleaded guilty, four pleaded not guilty and it is unclear what the other nine people pleaded.

On this basis, the success in contested cases is at best 39% and at worst 16%.

Worryingly the situation appears to be worsening in the current year. Of this year’s convictions, in only one case, involving two defendants, did the accused plead not guilty. The full figures to March 2000 will not be released until later this year but, on current form, look likely to spiral downwards.

Shocking reading

The figures make shocking reading when compared with the success of the Crown Prosecution Service and Serious Fraud Office.

Of nearly 1.5 million cases heard at magistrates court, the CPS managed a conviction in 98.3% of cases. In Crown Court, the CPS got a conviction in 89.1% of the 124,781 cases it prosecuted.

The SFO, however, considered 43 referrals and accepted 16 for investigation.

It worked on the investigation and/or prosecution of 94 cases during the year.

Eighteen trials took place involving 38 defendants with 31 convicted, six acquitted and in one case the SFO offered no further evidence – an equivalent success rate in more than 80% of cases.

The Revenue’s record is not one that impresses tax advisers.

‘The Inland Revenue would not dream of taking anything unless it was a stone-cold cert but they do get it wrong,’ says Chris Chadburn, national tax investigations partner at Baker Tilly.

‘In terms of the cases going through the Special Compliance Office, the cases prosecuted are not that special. The Revenue should take on the most serious cases but it is not doing it at present.’

Distress and expense

The Revenue figures are also expected to overlook the considerable number of cases that are investigated for prosecution but are dropped before they become a ‘criminal proceeding’ to the Revenue. But yet they still cause considerable distress and expense for those accused of evasion.

Looking at these figures, some tax advisers argue that the Revenue is spending most of its time pursuing the wrong people. They also question the appropriateness of its guidelines and whether they are actually being followed.

The Revenue’s policy (outlined in the box above, right) is one of selective prosecution involving the most serious cases across the full width of the tax system. The governing board is said to see this as an important part of its strategy to deter tax fraud and evasion.

It has scored some notable successes. One of the most high-profile cases to be prosecuted successfully was that of jockey Lester Piggott. After failing to co-operate with a Revenue and Customs & Excise investigation in 1987, Piggott was sentenced to five-years in jail for tax evasion.

He reportedly withheld details of 17 separate bank accounts holding revenues in excess of £2m.

One possible reason for the fall in successful prosecutions could be the loss of expertise from the Special Compliance Office to the private sector where these tax officers are in high demand and attracted by higher salaries than civil service pay scales allow.

Yet the problem has been recognised and the Revenue appears to be trying to put things right.

A source close to the SCO said the prosecution teams had been ‘beefed up’ following the failure of the government’s Spend to Save initiative to meet its targets.

The three-year initiative was designed to raise tax revenues and clamp down on fraud and evasion but is set to yield less than half its original £2bn target when it winds up in April.

But even with more staff assigned to cover prosecutions, the Revenue will suffer a long lead-in if it is to improve success rates while new people are bought up to speed with current techniques.

‘Clearly anyone who is being prosecuted by the Inland Revenue faces a serious situation,’ says Chantrey Vellacott tax partner Maurice Fitzpatrick.

‘But the Revenue’s declining record of successful prosecutions suggests that they may not be deploying their resources to their best effect.’

If that is the case the question of whether the Revenue is making effective use of taxpayers’ money needs to be answered.

WHAT CAN LEAD TO PROSECUTION BY REVENUE?

The Revenue is most likely to seek a prosecution if it finds evidence of:

– Deliberate concealment or deception;

– False or forged documents, certificates, statements, or claims, prepared with the intention to deceive;

– Conspiracy;

– Corruption;

– A second or subsequent serious offence;

– Additional books or records for accounting, tax, contribution or tax credit purposes, prepared or used with the intention to deceive;

– Organised or systematic fraud against the tax, contribution or credit systems;

– Unusual frauds of novelty or ingenuity;

– Deliberate manipulation of special tax deduction schemes; and

– Phoenixism (where successive business are deliberately allowed to become insolvent with substantial tax debts).

Additionally, the Revenue will consider prosecution in cases that involve:

– Theft or misuse of Inland Revenue documents;

– Assaults on, threats to, or the impersonation of Inland Revenue officials;

– The destruction of documents covered by the provisions in Section 20BB, Taxes Management Act 1970; and

– Offences by personnel employed by the Inland Revenue.