News Analysis – Will justice be sacrificed in rush to combat fraud?

The Inland Revenue is often seen as the bogeyman by tax advisers and taxpayers. And never more so than now given its announcement before Christmas that it planned to increase its powers for investigating tax fraud. The proposals, according to accountants, are both unnecessary and harsh. ‘New legislation is not needed as most of what the Inland Revenue is seeking could be incorporated into its existing powers,’ says John Gwyer, director of tax investigations at accountants Pannell Kerr Forster. The Revenue unveiled its proposals for combating serious tax fraud last November. They will allow tax investigators, where they have ‘reasonable grounds’ for suspecting serious tax fraud, to apply to a judge or magistrate for a judicial order requiring people to supply them with relevant documents. The Revenue says the proposal should be helpful to banks, lawyers, accountants and other third parties who have business connections with someone suspected of serious tax fraud, but no knowledge of the suspected fraud. Obtaining a warrant At present, in order to get the evidence needed for a criminal investigation, the Revenue has to get warrants to search the bank or accountant’s office, as well as the premises of the suspect. The Revenue says the use of a search warrant can be a source of ‘considerable commercial embarrassment’ to such people as well as being a cumbersome procedure for the Revenue. But Gwyer denies the claim that the new power would help them get documents more quickly and with less disruption. It says the reality would be a situation where a Revenue officer is authorised to demand a vast quantity of documents and files without proper consideration as to whether some are legally privileged, such as advice from an accountant, or whether they are in any way relevant, such as an individual’s medical history or journalistic material. Although privileged documents would have to be returned to the holder, the Revenue would have read them, thus defeating the privilege concept. ‘We are behind the authorities’ drive to modernise criminal investigations of serious tax fraud, but there are important considerations which need to be addressed before any new proposals are implemented,’ he says. First, it is necessary to resolve the question of professional privilege, which at the moment is subject to different interpretations in tribunals and the courts, according to Gwyer. ‘What we don’t want is a situation where the nature of the relationship between clients and their professional advisers is destroyed.’ Gwyer also warns that increased powers should not be devolved to any area of government ‘without the most stringent safeguards and suitable checks and balances being incorporated into the system.’ The current proposals are devoid of such protection. Thirdly, he argues, ‘the Revenue does not appear to have acceded to the parliamentary accounts committee’s suggestion that an independent fast-track complaints system be instituted to enable professionals to lodge confidential complaints about officers’ unacceptable behaviour’. ‘Harsh’ proposals Peter Bickley, technical manager at the Tax Faculty of the English ICA, agrees that the proposals ‘seem pretty harsh at the moment’. ‘It seems quite a wide package they’re thinking about bringing out,’ he says. ‘The main difficulty is that there’s a balance to be struck between the needs of the Revenue and the confidentiality of clients. It’s important they’re not subject to unreasonable investigation.’ Bickley also criticises the government for ‘trying to push this through a bit fast’. The two-month consultation period is not enough, especially considering the intervention of Christmas and the rush of January tax forms coming in. But there is little sign of that pace slowing. The chancellor also hopes to introduce legislation for the new powers in this year’s Budget, but the English ICA wants any changes to be made the following year. Specific documentation The institute is also urging the Revenue to cut down the scope of the documents it can take so they are more specific. ‘At the moment it’s asking for anything it wants,’ says Bickley. It should be known beforehand what documents are needed for the purpose of the proceedings. He also favours making the applications ‘inter parte’ – so the person under investigation is aware of the proceedings, though he accepts this would not be possible in a case where the person suspected might destroy documents. The method by which documents are served up should also be clarified, says Bickley. Does the Revenue wait for documents to be handed over, or use its manpower to dig them out? There should also be a minimum period of seven days for documents to be handed over and there should be a financial penalty imposed for non-compliance rather than a finding of contempt of court, which would put a person at risk of being sent to prison Bickley added that the exclusion for legally privileged documents should be extended to tax advisers. John Whiting, tax partner at PricewaterhouseCoopers, says the immediate reaction whenever the Revenue wants more powers is ‘a sharp intake of breath’. However, in the context of other powers, ‘it begins to look more reasonable’. He says: ‘They can ask nicely and get what they want or they can use section 20 or 20c.’ This will then enable the Revenue to make a dawn raid on a person’s home or business, which is achieved by obtaining a warrant from a court in an ‘ex-parte’ application – the person involved is not told of the action and is not involved in it. This is only done when the suspected fraud is very serious and is a ‘pretty heavy’ action, says Whiting. ‘What the Revenue wants is a more appropriate power that’s lower key.’ However, he cautions: ‘The question is: how can it be policed? What are the safeguards? We must make sure the balance is there. I would raise that as a bit of a concern.’ Like Gwyer, Whiting says the question of ‘privilege’ in relation to documents and other information held by accountants, banks and lawyers was also a problem. ‘This whole area needs to be looked at.’ The Revenue is sure to get its powers ‘but we have to make sure the thing operates properly,’ he adds. New proposals Under the new proposals, a tax officer will still have to convince a stipendiary or circuit judge (or in Scotland a sheriff) to make an order requiring a person to supply the Revenue with documents relevant to its investigation. In a technical note – Powers to Combat Serious Tax Fraud – which explains the proposals in detail, the Revenue also sets out proposals to clarify its right to printouts of relevant documents stored on computer both under the proposed power and the existing one. It adds that the focus will be on cases where prosecution will do most to promote and assist compliance with the law by deterring fraud and to reinforce the overall enforcement strategy. ‘The emphasis on serious cases is reflected by the fact that a guilty verdict usually results in a custodial sentence,’ says the Revenue note. The Revenue spokeswoman plans no further comment on the proposals ahead of the ending of the consultation period next week. But if the early responses are anything to go by it will not get its way with the profession easily. PROPOSALS FOR CHANGE Under present rules, where Revenue investigators suspect serious tax fraud, they must apply to a court for a search warrant, which will then entitle them to make a raid on the premises concerned. Under the new proposals, tax investigators would apply for a judicial order requiring people to supply them with relevant documents. This, says the Revenue, ‘would substantially reduce the need to enter and search premises for evidence.’ Currently, application to a court is ‘ex parte’. The person to be investigated will not be involved in the decision of whether or not a search warrant is given. The new proposals will also probably have an ‘ex parte’ application, but accountants would like to see an ‘inter parte’ arrangement – so the person investigated is involved in proceedings – in most cases. The current search powers – section 20 or 20c – is largely restricted to very serious suspicion of fraud. The new proposals aim to allow investigation of slightly less serious (though still serious enough) fraud.

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