Historical perspective

It seems that as soon as taxation was introduced someone tried to evade it. Originally taxation took the form of a tithe and it is said that if the record of animals and produce in the Doomsday Book was accurate the populace would have been starving to death!

For centuries Britain shied away from direct taxation because idea of disclosing income was resented. The first Income Tax as we know it was introduced as a temporary tax to help finance the Napoleonic wars. Evasion of tax by claiming excessive allowances became so prevalent that a drastic overhaul of all types of deductions was effected. In fact the exemption limit had to be reduced below £60, for it had been found that too many persons had been falsely returning a lower level of income. The official government explanation for this was that: "It is notorious that persons living in easy circumstances, nay even in apparent affluence, have returned their incomes at just under £60, though their annual expenditure has been treble that sum and on whom there was no ground for imputing extravagance . . . the income of whole parishes was swept away by this fraud."

Fraud and evasion were a major concern of a 1920 Royal Commission, which reported that the loss of revenue was so large that the powers of the Crown needed to be much enlarged.

Geographical Perspective & Magnitude

Obviously nobody really knows the size of the Black Economy. In Russia it is believed to be about the same size as the White economy. In Italy, Greece and Spain it is thought to amount to 20% - 30% of their Gross Domestic Product (GDP). In Germany the level is said to be 10% of GDP, whereas in the USA the Black Economy is estimated to be 8% to 10%. The Inland Revenue suggests that the UK’s Black Economy is of the order 6% to 8% of GDP. To put this into perspective - the Defence budget for financial year 1995/96 was 3.1% of GDP - at least half the size of the Black Economy.

Government reaction

During a speech to the Financial Crime Conference at the Cafe Royal on 6 June 1995, Sir George Young, Financial Secretary, made the following comments on the topic of tax evasion:

"The Government is deeply concerned that tax evasion be dealt with firmly. Tax evasion may constitute a criminal offence. And there may be very large sums at stake. Of course, the Government prefers, here as elsewhere, to encourage firms and people to pay the taxes they owe, rather than come after them. But, if necessary, the Revenue Departments do not hesitate to enforce debts. The honest suffer if the dishonest do not pay their dues."

It has long been the Government’s policy to deter tax evasion, although it is impossible to say how much tax evasion is prevented though deterrence. But, here again, although we would rather encourage voluntary compliance in the first place, we have measures in place to detect, and deal with evaders. Compliance work is also needed to detect those who do not meet their obligations. Inspectors have wide powers to obtain information from tax payers themselves and from third parties. Tax payers who are fraudulent or negligent in the handling of the tax affairs may incur penalties of up to 100 per cent of the tax in question. The Revenue also brings criminal proceedings in selected cases of fraud. Honest taxpayers would suffer through paying more tax than they needed to, if those liable to tax did not pay, were it not for the efforts of the Revenue. This would not be right. It has thus always been our policy to try to ensure that people pay the tax they should.

During 1993/94, Revenue Tax Offices successfully completed over 70,000 investigations with a yield of £980 million, almost £1 billion. And the total yield from all types of compliance work in 1993/94 raised a sum equivalent to 2.5p on the basic rate of tax. In short, if the Revenue had not raised this sum, honest taxpayers might have been asked to stump up an extra 2.5p on the basic rate. I am sure you will agree that this would hardly be fair to those who already had paid what they owed. And, of course, if the Revenue did not seek to enforce its demands, this would encourage others not to pay what they owed. A vicious downward spiral. This is not to say that the Government is resting on its laurels. Let me illustrate:- in the 1993 Public Expenditure Survey, the Government arranged an increase in compliance work staffing equivalent to around 100 fully-trained inspectors. The Revenue is now concentrating more of its resources on compliance work and focusing on cases where anticipated yield is the greatest. And it remains alive to new challenges".

The Chancellor reinforced those comments during his budget speech. He announced a major drive against fraud and drew particular attention to the intensified effort by both HM Customs & Excise and the Inland Revenue to target tax fraud.

Counter Evasion & Counter Avoidance

Source: One hundred and thirty seventh report of the Commissioners of Her Majesty’s Inland Revenue for the year ended 31 Mach 1995.

Self Assessment - the catalyst for change

Self Assessment has provided a catalyst for the introduction of random tax audits, new powers, and a reorganisation of the Revenue’s office structure. The new Tax District Offices have dedicated compliance units, led by experienced investigators – who may well have served previously with Enquiry Branch or Special Office. We have already seen the merger of the Revenue’s specialist investigation agencies, such as Enquiry Branch, Special Office, Board’s Investigation Office and Special Trades Investigation Unit, under the umbrella of Special Compliance Office (SCO). That office is charged with the task of combating the more serious cases of tax avoidance, evasion and fraud.

SCO’s role as the prosecution arm of the Revenue has been strengthened by the introduction of dedicated Criminal Prosecution Units and this reflects the Revenue’s desire to mount more prosecutions as a deterrent against tax evasion. Moreover the traditional target of "high net worth individuals" has been replaced by "prominent members of society".   Obviously the Revenue wants to maximise the publicity value of any prosecutions. Specialised units, such as an Insolvency Unit, are being established within SCO to combat particular kinds of tax evasion.

The Revenue aim to carry out somewhere in the region of 10,000 random tax audits each year, besides the traditional targeted investigation programme. The Revenue will, in the vast majority of cases, continue to accept the information contained in the tax return without further query. This is similar to the pre self assessment position, where over 90% of accounts were accepted.  Every return will be subjected to an initial screening to ensure that obvious arithmetical errors are spotted. The Revenue will be able, at any time up to nine months after receipt of a return, to correct such errors. This process will be known as "repairing" the return. The initial screening will also include putting the return information through a number of "risk analysis" computer programs. These will highlight any areas of apparent inconsistency (such as fluctuating profits taking one year with another, abnormal profit ratios compared with other similar businesses etc) to identify returns that may merit closer attention from an Inspector. The final decision whether a return should be enquired into will still rest with the Inspector. Additionally, the initial screening programs will select the returns for random tax audit. It is perhaps interesting that the Revenue are seemingly unwilling to comment upon their random selection criteria. One hopes that the past preoccupation with soft targets such as Publicans, Taxi drivers, Shop Keepers’ and so on (the happy hunting ground of many a trainee Inspector) will not overshadow this change.

The Revenue certainly recognises the concept of deterrence and indeed some time ago those in charge advocated an investigative presence in each sector. At the time they felt that company investigations were at the minimum level necessary to provide any form of deterrent. It may be that companies will come under a lot more scrutiny - not just because the Revenue feel that this sector has been neglected but more to do with the fact that a large number of highly trained and experienced Tax   Inspectors will be released from their traditional roles.

It can be expected that attention will be focused upon owner managed companies simply because it is perceived that there is a close link between the personal interests of the director/shareholder and the affairs of the company. Another selection criterion may even be particular industries. Certainly the Revenue have for some years labelled businesses with standard industry classification numbers so such a task would be quite simple for any modern computer. Such numbers were historically allocated to facilitate the information needs of the Government Statistical Service.

Background

The care and management of Income Tax, Corporation Tax and Capital Gains Tax is entrusted to the Commissioners (i.e. the Board) of Inland Revenue under Section 1 of the TMA 1970. With approximately two million business taxpayers and half the population as personal taxpayers the Inland Revenue has an onerous responsibility for policing compliance with the Taxes Acts. The Revenue therefore directs its resources to those areas that would appear to justify enquiry. Those areas are:

	Where the taxpayer has failed to notify chargeability to tax;
	Where the taxpayer has failed to complete a statutory return which has led to a loss of tax;
	Where the taxpayer has submitted incorrect accounts or returns.

Inland Revenue Investigation Agencies

Of the various investigation agencies the highest yield is produced by the local Tax Offices. Although they account for the largest number of settlements and the greatest total yield, the average yield per investigation is relatively small by comparison with Special Compliance Office:

The local Inspector has considerable information resources at his disposal.  In addition to his or her own local knowledge, Head Office provides the result of National research material in the form of Business Economic Notes (published) and Business Intelligence Tactical Notes (unpublished). The latter in particular contains guidance on investigating particular types of business.

Local Inspectors are under mandatory instructions to transfer certain cases to Special Compliance Office such as:

	Cases of suspected substantial frauds in connection with business and professional profits, such as falsification of documents, forgery or conspiracy to defraud;
	Cases of substantial internal manipulations of business profits. The current thresholds are believed to be £20,000 a year, or £50,000 in total;
	Substantial investigations involving groups of companies spread over various Tax Districts;
	Cases involving false documents, for example, statements of assets, certificates of disclosure, purchase invoices etc;
	Cases where there are grounds for suspecting the honesty of any person engaged in the administration of tax such as Accountants and Solicitors or anyone prominent in public life, for example a Justice of the Peace.

Board’s Prosecution Policy

Every fraud on the Inland Revenue is potentially a prosecution although comparatively few frauds are brought before the Courts. The majority of prosecutions in fact relate to Sub-Contractor and increasingly PAYE frauds.

Media attention plays an important part in the Revenue’s prosecution policy and there is no doubt it has a deterrent affect. On the one hand, the Revenue will prosecute very substantial frauds involving business profits and comparatively small frauds involving Sub-contractors, PAYE etc., while on the other hand it will accept monetary settlements which range from very small amounts to very substantial amounts. The message that it wants to get across appears to be that there is no type of fraud that the Revenue will not prosecute and that size is not the overriding factor. The Revenue will consider prosecution where any of the following factors are a feature:

	Non-disclosure following Hansard;
	Incomplete disclosure;
	False certificate of disclosure or false statement of assets;
	Creation of false documents;
	Collusion between taxpayers to defraud the Revenue;
	Fraudulent actions of tax advisers.

Prosecution work is time consuming, the cases can be very complicated and the standard of proof required is high. Whilst the Revenue want some prosecution work on a regular basis just to keep it in the public eye they also want monetary settlements and these still account for the vast majority of cases.

Staff

The Inspectors who staff SCO are of principal and senior principal grade. They are recruited from Tax Districts where they have displayed particular skills in investigation work. From the thousands of Inspectors in the District network very few are chosen to work in SCO. It is unwise to underestimate the skills of the Inspectors in SCO who, besides their technical skills, are full-time Investigators who have served their apprenticeships in Districts.

In addition SCO houses the former Accountancy Unit. The traditional role of the Revenue accountant is:-

	to examine business books and records and report thereon,
	to give advice on accountancy law and practice to the Inspectors of Taxes,
	to give evidence in prosecution cases on accountancy matters,
	to monitor the work of accountants - this has been perhaps the most important of the Revenue accountants functions.

The reason the Revenue is interested in monitoring the work of accountants is that it places a great deal of trust in professional accountants. It because of that trust that the vast majority of accounts are accepted by the Revenue without being challenged

Types of opening interview

Before any initial interview with SCO is arranged it should first be determined what type of opening interview is to be conducted. There are essentially three types of opening interview:

	Hansard;
	Neutral;
	Warning.

The Hansard interview is the one most commonly used and is the most straightforward. The object is to get an admission from the taxpayer and his authority for the preparation of a report. The Neutral opening is used when the Revenue wants to keep its options open as to prosecution. It starts off as a fact finding interview and depending on those facts will depend whether the interview continues as a Hansard or Warning interview. The Warning interview, which is conducted in accordance with the Police and Criminal Evidence Act, is used where the Revenue has good prima facie evidence of a serious nature but is prepared to listen to and record the taxpayer’s explanations to the questions that it raises. The questions will have been prepared in advance and are in a structured form with supplementary questions depending on the taxpayer’s answers to the initial questions.

The "Hansard Extract"

In reply to a Parliamentary Question on 18 October 1990, the Chancellor of the Exchequer gave the following answer regarding tax fraud:

"The practice of the Board of Inland Revenue in cases of tax fraud is as follows:-

(1) The Board may accept a money settlement instead of instituting criminal proceedings in respect of fraud alleged to have been committed by a taxpayer.

(2) They can give no undertaking that they will accept a money settlement and refrain from instituting criminal proceedings even if the case is one in which the taxpayer has made full confession and has given full facilities for investigation of the facts. They reserve to themselves full discretion in all cases as to the course they pursue.

(3) But in considering whether to accept a money settlement or to institute criminal proceedings, it is their practice to be influenced by the fact that the taxpayer has made a full confession and has given full facilities for investigation into his affairs and for examination of such books, papers, documents or information as the Board may consider necessary".

The above statement of practice should be regarded as replacing the one given by the then Chancellor of the Exchequer on 5 October 1944.

1. Have any transactions been omitted from or incorrectly recorded in the books and records of any business with which you have been connected, either solely or in partnership or as a director or in any other capacity?
2. Are the accounts, which have been sent to the Inland Revenue for all businesses, covered by question 1 correct and complete to the best of your knowledge and belief?
3. Are all your personal tax returns correct and complete to the best of your knowledge and belief?
4. Are all tax returns submitted on behalf of companies, in which you have or have had an interest either as shareholder and/or director correct and complete to the best of your knowledge and belief?
5. Are all returns made as employer and contractor correct and complete to the best of your knowledge and belief and has PAYE been correctly operated on all emoluments paid to employees?
6. Are you prepared to permit an examination of the records of all businesses with which you have been connected, together with your personal financial records, in order that the Revenue may be satisfied that your answers to the first five questions are correct?

The "Formal Caution"

"You do not have to say anything. But it may harm your defence if you do not mention, when questioned, something which you later rely on in Court. Anything you do say may be given in evidence"

It should be remembered that the right of silence remains. No one can be forced to incriminate himself or herself. At worst an Inference can be drawn but this may well be of much less consequence than saying too much before professional advice is sought.

There some areas where the prosecuting agency can trip themselves up. For example, the formal caution must be given as soon as sufficient evidence to prosecute is held. Moreover, it not sufficient that evidence of fraud exists – it is vital that the prosecution can demonstrate that there was an intention to defraud.

If the formal caution is to be given then it is imperative that a Solicitor who is experienced in ‘white collar fraud' is involved at the beginning. There still remains a crucial role for a Tax Consultancy skilled in Tax Investigation Defense work, such as KTSL :

Working alongside the Solicitor as part of a tax investigation defence team, our ‘inside’ knowledge of the workings of the Inland Revenue may well make a difference as to whether or not the Revenue can be persuaded to change their mind and work the enquiry with a view to fiscal settlement instead of prosecution.

Even where prosecution is being pursued, it should be remembered that the tax involved needs to be quantified – the Revenue will be keen to maximise the tax allegedly involved to paint matters in the worse light possible, and it is a wise precaution to have someone on the team who can dissect their methodology and even reduce the tax bill by reviewing matters afresh.  After all the investigator will have jaundiced eyes!

Pricing

We are always pleased to supply firm fee quotations.  We prefer to negotiate a method of payment that suits the client, whether by reference to hourly based fees, monthly retainer, an agreed  percentage of the real saving achieved by our efforts, or indeed a mixture of these.  Upon request we will agree at the outset an upper limit to our fees.