The new Chancellor of the Exchequer, Rachel Reeves, has promised the HMRC more resources to tackle tax evasion and fraud in an effort to plug some of the £22 million gap in public finances. The Treasury’s public spending audit document stated:
“The government is committed to tackling tax non-compliance, including from fraud and tax avoidance, to ensure everyone pays their fair share. The government will increase HMRC’s compliance staff, invest in HMRC’s resources and technology infrastructure, and make legislative changes to tackle tax non-compliance and raise revenue.”
Tax evasion and tax fraud encompass many activities including commonly known offences such as income tax fraud and VAT fraud. There are also more complex types of fraud such as missing trader fraud, also called ‘missing trader intra-community’ (MTIC) fraud, which involves exploiting VAT regulations governing cross-border transactions within the EU. This deceptive practice capitalises on the absence of VAT charges on such transactions. MTIC fraud also includes acquisition fraud, carousel fraud, and contra trading.
In this article, we explain everything you need to know about the offence of tax evasion and tax fraud. At the end, we have provided a helpful checklist that details what you should do if you are accused of one of these offences.
Related Article: Tax Evasion – Court Finds No Breach Of Directors Duties (Carey Street Investments Ltd (In Liquidation) v Brown [2024] EWCA Civ 571)
What is tax evasion?
When it comes to tax evasion, an offence is committed when a person engages in dishonest practices to reduce or avoid paying tax.. The Prosecution has to prove that you dishonestly evaded paying tax rather than just “avoided” doing so.
The Taxes Management Act 1970 (TMA 1970) provides for the offence of income tax evasion. Section 106A states that a person commits an offence if they are knowingly concerned about the fraudulent evasion of income tax by themselves or another person. The offence does not apply to things done or omitted before 1st January 2001.
Other ways a person can defraud HMRC, or the Department for Work and Pensions (DWP) include:
- Making a false statement (whether written or not) relating to income tax.
- Delivering (or causing to be delivered) a false document relating to income tax.
- Failing to account for VAT.
- Withholding PAYE and National Insurance.
- Failing to register for VAT.
- Failing to disclose income.
As well as statutory offences, there is a common law offence of cheating the public revenue.
Concerning the evasion of income tax, the Prosecution must prove that the Defendant was “knowingly concerned in the fraudulent evasion of income tax.” This is known as the mental element of the offence.
What is the difference between tax evasion and tax avoidance?
Tax evasion is the deliberate non-payment of tax, for example, not declaring taxable income and accepting cash-in-hand payments to reduce tax liability. On the other hand, tax avoidance, or “tax planning”, is the mitigation of tax liability through legal methods, for example, setting up trusts to protect assets or offshore companies.
Tax avoidance is legal, but evasion is not.
Can you be jailed for tax evasion in UK?
If you are convicted of tax evasion in the Magistrates’ Court, you could be sentenced to a maximum of six months in prison and/or an unlimited fine. Crown Court convictions may result in up to seven years in custody and/or an unlimited fine. Under the Sentencing Guidelines for fraud, bribery, and money laundering offences, aggravating, and mitigating factors can increase or decrease the final sentence.
Where the offence was committed before 12th March 2015, the maximum fine is £5,000.
The maximum sentence is life imprisonment if you are convicted of cheating the public revenue. In reality, sentences are far shorter and are decided under the Sentencing Guidelines.
What powers do HMRC officers have when investigating a tax evasion matter?
HMRC officers have wide ranging powers derived from a number of statutes, including the Police and Criminal Evidence Act 1984 (PACE 1984), which provides HMRC investigating officers with the following powers:
- Ability to request the surrender of documents.
- Authorisation to enter, search, and seize evidence on premises occupied or controlled by you if you are arrested.
- Arrest and interview you.
HMRC officers also have powers, in certain circumstances, to conduct covert surveillance, access financial information, and freeze assets.
What is ‘dishonesty’ concerning tax evasion offences?
The majority of tax evasion offences require individuals to engage in fraudulent conduct, implying an act of dishonesty. This might involve using false invoices to decrease the taxable profits of a business or knowingly understating income in an annual return. The test for dishonesty is:
- What was the Defendant’s actual state of knowledge or belief as to the facts?
- Irrespective of the Defendant’s belief about the facts, was their conduct dishonest by the objective standards of ordinary decent people?
Dishonesty is a key element of tax evasion offences and must be proved if the Prosecution is to achieve a conviction.
Checklist – What steps should I take if I am accused of tax evasion or tax fraud?
Being investigated by the HMRC for tax evasion or tax fraud is a frightening experience. You may want to ignore the situation and hope it goes away, but trust us, it will not. HMRC has prosecution targets to meet and, especially given the Chancellor’s latest announcement (see above), there are concerns that the department will pursue a criminal case where in the past, a civil penalty would have been imposed.
Below are the following steps you should take to increase your chances of favourable outcome:
- Do not discuss your case with HMRC, or anyone else, until you have consulted with your legal team.
- Do not obstruct HMRC officers since in so doing you may be committing an offence.
- Contact a specialist Tax Fraud Solicitor. They will quickly work to find out why HMRC suspects you of tax fraud or tax evasion. In addition, they will identify documents that are subject to legal privilege and provide an emergency response if your premises is subject to a dawn raid. An experienced Solicitor will advise you on matters of law, evidence and procedure. They will advise you on the legitimacy of any warrants executed, what you should do during an interview, and any preparation to be undertaken. Importantly, an experienced Solicitor will seek to ensure all of your rights and entitlements are protected.
- Ensure your organisation has a policy detailing what to do in a dawn raid, individuals who are to be responsible during this time, and key professionals to be contacted immediately, including Solicitors and Accountants
- Monitor any actions by HMRC, and make contemporaneous notes of key events, items seized, people spoken to, etc.
- Request a copy of any search records from HMRC.
- Ensure all documents are backed up since they may be crucial to your defence.
Concluding comments
Being investigated or prosecuted for tax fraud or tax evasion is incredibly serious and if convicted, you could go to prison. Our Business Fraud Solicitors have extensive experience in successfully defending complex tax fraud cases and will provide the advice and representation you need to manage an HMRC investigation or prosecution.
To discuss any points raised in this article, please call +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.
Note: The points in this article reflect the law in place at the time of writing, 12 August 2024. This article does not constitute legal advice. For further information, please contact our London office.
Share this Post