The fight against tax evasion

Money Talk By Ronnie Ludwig Saffery Champness accountants

Ronnie Ludwig, Saffery Champness

The tax man has been given a pat on the head in the National Audit Office's review of its efforts to tackle the so-called "hidden economy".

However, figures recently released by HM Revenue & Customs (HMRC), in its own performance report, show that the yield obtained from all of its counter evasion work has increased dramatically over the last fifteen years.

The money gleaned from reluctant taxpayers, both personal and corporate, has risen from £1.13bn in 1991-92 to a staggering £9.17bn in 2006-07.

The money has come from a wide range of sources: from individuals and companies who had simply failed to fill in their forms, to investigations of outright tax dodgers.

The £400m in extra tax that will be coming from people who have been hiding money in offshore bank accounts does not feature in the figures yet.

But in 2006-07 the Revenue gleaned an extra £834m from tighter scrutiny of corporate tax returns and more than £1bn from probing self-assessed tax returns.

This money was obtained by staff in the Revenue's routine network offices.

Even more spectacular has the been the haul of cash gained by staff in the various specialist offices, who work on bigger examples of deliberate fraud.

Their work gained the Revenue an extra £3bn in corporation tax from employers, as well as £2.6bn dug up by the sort of specialist teams that have now been put to work on the offshore bank accounts.

Value for money

All these figures reflect the greater resources deployed by the Revenue in its drive to counter fraud and evasion and also demonstrate an increase in the investigatory skills of the staff involved.

The scale of tax evasion is continuing apparently unabated and on a massive scale

In the 10 years since the introduction of "self-assessment", the Revenue has been retraining its staff to develop their investigatory skills, rather than dealing with compliance and the preparation of assessments, as was previously the case.

There seems little room for doubt that the strategy has proven successful, given the nine-fold increase in the amount of tax recovered.

The published HMRC performance report shows that the average cost of collection is just over 1p for every pound of tax recovered, which represents a very good "return" on the money spent.

Sadly, that is far from the end of the story.

The published statistics also suggest that the scale of tax evasion is continuing apparently unabated and on a massive scale.

Prosecutions

Despite the widespread evidence of serious fraud, the rate at which the Revenue has initiated prosecutions for false business accounts and tax returns has halved over the last 15 years.

Laurence Ford received 6 years in jail in 2006 for a VAT fraud

In 1991-92 there were 134 convictions, falling to a low of 55 in 1995-96.

This has marginally increased to 70 convictions in 2006-07 and demonstrates a clear reluctance on the part of the authorities to take tax evaders to court.

There have been a number of very high-profile cases over the years, however.

In 1987, the case against Lester Piggott culminated in the former British champion jockey receiving a three-year term of imprisonment after pleading guilty to serious tax fraud charges.

One of the aggravating features had been that he had undergone two previous tax investigations, at the conclusion of which he had signed false statements of assets.

In their sights

The "innocent until proven guilty" principle goes by the board when a prosecution is likely.

In extreme cases, the Revenue may resort to the infamous "dawn raid"

The tax inspector investigating the case is already convinced that the subject of the investigation has committed serious fraud.

The only question in his or her mind is whether the case is one of the majority, which is suitable for pecuniary settlement, or alternatively one of the very few which merits criminal prosecution.

The Revenue has access to a phenomenal amount of information and is able to compare similar businesses operating in the same area on a product-by-product basis.

This in itself can be sufficient to provoke an investigation and the tax inspector will invite business owners to substantiate why their business is not making the same profit as comparable businesses in the same area.

It is, of course, notoriously difficult to prove a negative and can be extremely costly to do so.

There are many examples of business men and women simply paying the tax on the grounds that they cannot afford the costs associated with defending themselves.

Dawn raids

In extreme cases, the Revenue may resort to the infamous "dawn raid" where the taxpayer may be the subject of a raid, probably both at his home and at the business premises.

The Revenue would almost certainly mount simultaneous raids on the taxpayer's professional advisors.

That would be the case, even if neither set of advisors is suspected of wrongdoing.

In one case, a number of years ago, when a senior tax inspector operating in the Revenue's Special Compliance Office was himself suspected of fraud, the Revenue's elite Enquiry Branch officers staged a dawn raid on the Revenue's Special office just across the road.

Effectively, one Revenue department carried out a dawn raid on another Revenue department.

Computer databases

There is no doubt that the Revenue is becoming much more skilful in tackling tax evasion and is now using highly-developed computer programs to assist it in the process.

Unfortunately, a great many people are operating businesses and failing to declare anything to the Revenue.

This is particularly true of internet traders.

There is nothing wrong with getting rid of the odd unwanted item on sites such as eBay.

However, it is quite obvious that a number of individuals are actually trading through these websites and clearly have a stock of items for sale at a profit which is then hidden in an offshore bank account.

As time goes by and techniques improve, especially with the aid of sophisticated computer programmes, the crackdown will be felt in these areas also.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

E-mail this to a friend

Printable version