HMRC needs to better target the stick

THE LONG-AWAITED National Audit Office report on HM Revenue & Customs’ “Managing Civil Tax Investigations” was published just before the Christmas break.

The report shows that HMRC is collecting in more money and it’s costing less to do so – but the pressure HMRC faces in bringing in the money, and quickly, is not helping to bring about a change in taxpayer behaviour.

HMRC’s key objective is to reduce the tax gap – the difference between what is collected and what should be collected – but by focusing on yield as a measure of success they ignore other important elements of performance: preventative work; impact on taxpayer behaviours; and balancing between short term priority of generating tax with longer term outcome of improving compliance.

On the final point there is clearly a tension between being only measured on yield from the non-compliant rather than encouraging compliance.

Investigators are under particular pressure to settle cases that are open for over a year and to meet financial targets, and with HMRC’s year-end approaching on 31 March the pressure is even greater.

HMRC operates the civil investigation system using a carrot and stick approach. A carrot is offered of reduced penalties for disclosure and co-operation with the stick of possible prosecution if the taxpayer lies during the investigation.

The reality to this is quite different as the stick is ordinarily used only for serious criminal behaviour such as large-scale VAT fraud or drug trafficking. There are very few prosecutions for more straightforward tax evasion simply because prosecutions are incredibly resource intensive.

HMRC then finds itself caught in an awkward position as it can’t then use the number of successful prosecutions as a way of deterring future tax evasion…so they have hardly any stick to rely on!

HMRC’s key to success in attacking fraud and evasion is heavily dependent on picking the most appropriate cases for detailed investigation.

Statistics for 2009/2010 settlements of civil investigation of fraud cases provide strong indicators that there is substantial room for improvement in selecting the most appropriate cases: 14% were settled without a penalty; 14% were settled for a penalty of 10% or less of the tax due; 23% were settled for a penalty of more than 30%, and the average penalty was 23% of the tax due.

Very often a penalty will be reduced as HMRC finds that the individual does not have the assets to pay. HMRC needs to allocate resources to cases where the rewards are greater, and where the individual being investigated has the assets to be able to pay the tax, interest and penalty. Successful investigations where a large penalty is imposed will of course provide a better deterrent for future evaders if the results are widely publicised.

NAO have suggested improving fraud investigations by having two parallel investigation routes instead of the one-size-fits-all-approach that does not fit with HMRC’s intention of matching resource to the problem.

There could be a more simple process for straightforward cases and then a more detailed process for the more complex cases. The offshore disclosure facilities that are working well would seem to point the way; offering a clear and prescriptive approach to the report and then a light-touch follow up. It would certainly reduce delay and cut costs.

There would also be more time saved if the investigation was more collaborative, particularly at the outset. At the moment HMRC holds an initial and rather lengthy meeting at which they set out the powers and penalties available to them ad nauseam. It’s very one-way and would benefit from changing to a more open discussion where the issues and differences are set out so that each of the parties has a chance to ask questions and the individual is clear as to what is being asked of him, why it’s being asked, how he can assist the investigation, and the possible outcomes are explained fully.

HMRC really needs to start thinking seriously about how they deploy their resources if they are to change taxpayers’ behaviour and close the tax gap.

Chris Chadburn is a founder of venntax, an association of independent tax advisers supporting accountancy practices nationwide – Chris spent 12 years with the Inland Revenue and was district inspector in the Kings Cross & Hackney offices, and is a former partner at Moores Rowland and Baker Tilly. He has spent 30 years specialising in tax investigation work, in particular dealing with cases to do with serious fraud.


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