No favouritism!
A review of HM Revenue and Customs’ prosecution policy in the light of recent cases.
Article appeared in Taxation in July 2005.
What do a chartered accountant, a photographer and a company director have in common? The answer is they have all been prosecuted by the Inland Revenue within the last 12 months.
The chartered accountant, Mr Lewis, was sentenced to 12 months imprisonment after pleading guilty to eight counts of cheating the Public Revenue. Mr Lewis had failed to pay over to the Inland Revenue PAYE tax and National Insurance Contributions deducted from payments made to his staff. He had also failed to submit self-assessment tax returns of his profits as an accountant. The total amount evaded, including interest, amounted to £200,000.
The photographer, Mr A Hirani, was jailed for three years after being found guilty of cheating the Inland Revenue. Mr Hirani had failed to notify the Inland Revenue that he was working as a wedding photographer; the total tax loss was estimated at £75,000. In addition, Mr Hirani had fraudulently claimed stated benefits, estimated at £110,000, which he was not entitled to.
In the third case, Mr Bowers, a company director, was sentenced to 12 months imprisonment after using company funds to renovate his family home. The tax loss was calculated to be £70,000 but Mr Bowers was ordered to pay a £252,977 confiscation order. The benefit had been calculated by reference to the Criminal Justice Act 1993 and the Proceeds of Crime Act 1995.
“Serious fraud”
The only reference to “serious fraud” in the tax legislation is contained in S 20C (1A) TMA 1970:
“Without prejudice to the generality of the concept of serious fraud
(a) any offence which involved fraud is for the purposes of this section an offence involving serious fraud if its commission had led, or is intended or likely to lead, either to substantial financial gain to any person or to serious prejudice to the proper assessment or collection of tax; and
(b) an offence which, if considered alone, would not be regarded as involving serious fraud may nevertheless be so regarded if there is reasonable ground for suspecting that it forms part of a course of conduct which is, or but for its detection would be, likely to result in serious prejudice to the proper assessment or collection of tax.”
Selective prosecution policy
The Inland Revenue operates a selective prosecution policy, seeking to prosecute for a range of offences and across a diverse range of professions and businesses. It is worth noting that the amount of tax involved is not the main factor when the Inland Revenue decides to prosecute. This is reflected in the decision to prosecute cases where the tax involved was relatively low, including tax credit cases where the amount may only be a couple of thousand pounds.
The Inland Revenue has historically prosecuted only a small number of individuals each year. In the year to 31 March 2004, the latest year for which figures are available, there were 110 prosecutions, of which 99 resulted in a conviction. It is worth pointing out that the prosecutions included 59 relating to Tax Credits and 17 relating to internal fraud (either Inland Revenue staff or outside accomplices), leaving 34 for false accounts or similar tax offences. It can be seen that, although the Inland Revenue does not prosecute a large number of tax offenders, it selects the cases with care to ensure the maximum chance of success.
Alternative to prosecution
The Inland Revenue does not have the resources to prosecute everybody who is suspected of serious tax fraud. As an alternative to criminal proceedings, the Inland Revenue offers a procedure known as “Hansard”. These cases are worked under Code of Practice 9. Under this process individuals are given the opportunity to make a full disclosure of any tax irregularities in return for the guarantee of a civil settlement.
The Taxation issue of 13 January 2005, pages 346 – 348, contained an article by Stephen Camm and David Hill on the changes in interview procedures under Hansard following the Gill and Gill case. When considering whether to opt for the short or full opening Hansard interview, page 347, readers are advised to inform the investigator in advance, to ensure that the meeting runs as smoothly as possible for the client. Also, it is considered good practice to invite HMRC to detail the case against the client, on human rights’ grounds. The inspector will give a standard response, and not disclose HMRC’s case, but this approach may assist the client if he is subsequently prosecuted.
Practitioners should be aware that a client who is given an opportunity to make a confession under Hansard but denies irregularities, or who makes an incomplete or incorrect disclosure, faces the prospect of prosecution.
Prosecution selection process
The Inland Revenue determines which taxpayers it will prosecute by reference to the facts of each particular case. Each case is considered on its own merits. A civil settlement is unlikely to be sought, and prosecution is more likely, in certain categories of case, for example in cases where evidence exists, or is likely to become available of:
- > deliberate concealment or deception;
- > false or forged documents, certificates, statements, or claims, prepared with the intention to deceive;
- > conspiracy; and
- > corruption.
There are other circumstances which will increase the prospect of criminal proceedings. These include, but are not restricted to:
- > money laundering offences,
- > a second or subsequent serious offence against HMRC;
- > 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, NIC, stamp duty or tax credit systems; and
- > phoenixism (where a business is carried on successively through a series of companies each in turn deliberately becoming insolvent with substantial tax and similar debts to government departments).
Other prosecution triggers
The status of the person under investigation is also a consideration in the
decision whether to prosecute. If evidence is obtained, or is likely to be
obtained, of tax frauds in which an accountant, lawyer or other tax adviser
is involved, that person is likely to be prosecuted, as Mr Lewis found out.
This applies whether the person acted on their own account, or in connection
with a person they assisted.
Where an investigation concerns a person involved in the administration of
taxation, to those occupying a prominent position in the field of law or government,
or personnel in government departments who are administering tax, benefits
or law enforcement similar considerations will apply as to accountants, etc.
Consideration will also be given to 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 Inland Revenue personnel.
It is worth pointing out that where two or more persons have committed, or are suspected of committing, tax fraud, the Inland Revenue is not required to treat all defendants in the same way. The Inland Revenue may decide to prosecute only certain individuals, and to deal with the other defendants in a different way.
The selective nature of the prosecution policy has been challenged in the courts. Following an investigation into the tax affairs of an accountant, the Inland Revenue brought criminal charges against the accountant and two of his clients. The clients applied for judicial review of the decision to prosecute them. They contended that they had been unfairly treated because other clients of the accountant were not prosecuted. The application was dismissed. The policy of selective prosecution was considered rational and was “probably the only workable policy”. R v CIR (ex p. Mead & Cook), QB 1992, 65 TC 1; [1992] STC 482; [1993] 1 All ER 772.
There have been other instances where the Inland Revenue’s selective policy has been challenged, including R v CIR (ex p. Allen), QB 1997, 69 TC 442. The policy has been upheld on each challenge.
Voluntary disclosure
Where a taxpayer has committed tax fraud and he wishes to “come clean” and make a voluntary disclosure, he will not be prosecuted by the Inland Revenue, who will accept a civil settlement, providing he makes a full disclosure. This is subject to the proviso that the person is not under enquiry, and the desire to disclose has not been prompted by the threat of imminent discovery by the revenue authority.
Such cases require careful handling, to ensure that the risk of prosecution in these circumstances is minimised.
HM Revenue and Customs
Readers will be aware that, on 18 April 2005, the Inland Revenue merged with HM Customs and Excise (HMCE) to form a new department, HM Revenue and Customs (HMRC).
Historically, the Inland Revenue and HM Customs and Excise were prosecuting authorities in England and Wales. Responsibility for prosecuting all HMRC criminal cases in England and Wales has now passed to an independent authority, the Revenue and Custom Prosecutions Office (RCPO).
The RCPO was created under the Commissioners for Revenue and Customs Act 2005, and took effect from 18 April 2005. A Memorandum of Understanding has been published regarding the relationship between HMRC and RCPO and the conduct of criminal investigations and prosecutions by the two departments.
The Procurator Fiscal and the Public Prosecution Service for Northern Ireland (PPS) (formerly the Department of the Director of Public Prosecutions) are the prosecuting authorities in Scotland and Northern Ireland respectively.
It is anticipated that the selective prosecutions policy, operated by the Inland Revenue, will be adopted by HMRC.
The need for an independent prosecuting authority
Following the collapse of several high profile Customs trials, the Government commissioned two separate reviews. The first, Gower Hammond, reported in December 2000, and the second, Butterfield, reported in July 2003. Both reviews recommended greater independence for prosecutors from HMCE.
The Gower Hammond Review followed the failure of two major drugs prosecutions conducted by HMCE in the late 1990`s. The review considered the structure and practices of the Prosecutions Group within the HMCE Solicitors Office. Following completion of the review a number of recommendations for the Prosecution Group’s future development were made.
This included the recommendations that the Prosecutions Group should be given greater independence within the Solicitor’s Office, and that there should be ministerial accountability to the Attorney General alone. The Review considered it essential that there was independence from investigators. The Prosecution Group was renamed Customs and Excise Prosecutions Office (CEPO). A Memorandum of Understanding, setting out the relationship between CEPO, the Attorney General and the Commissioners of Customs and Excise, was agreed.
Mr Justice Butterfield was asked to undertake a review following the collapse of further HMCE prosecutions. These were the fraud cases collectively know as London City Bond. Serious allegations of non-disclosure were made against Customs, and, in a number of cases, the appeals were successful. Mr Justice Butterfield was asked to consider how the mistakes made during the London City Bond cases had occurred and how they could be avoided in the future.
A major finding of the Butterfield Report was that it was essential to build on the progress made since the Gower Hammond review. Mr Justice Butterfield recommended "a complete separation of the prosecuting function for HMCE`s criminal cases from the organisation itself, through the creation of a separate prosecuting authority." The Government accepted this recommendation in December 2003.
At the same time, a separate review of HMCE and the Inland Revenue
was undertaken by the Treasury. This review concluded that the two departments
should be merged.
Against this background, the Attorney General, Lord Goldsmith, announced
in October 2004 that Inland Revenue prosecutions would join the new independent
prosecuting authority.
Phil Berwick is Director of Tax Investigations at Tenon, leading accountants
and business advisers. Email: phil.berwick,
Tel: 020 7535 5564.
