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The last three years have seen something of a publicity storm surrounding tax evasion and avoidance. Whether it be celebrities making use of film schemes to avoid UK taxes, multi-national corporations using sophisticated tax planning arrangements or UK residents stashing money offshore it has been hard to escape the media outrage.

The very mention of tax evasion and tax avoidance causes nothing short of head shaking contempt in the court of public opinion. Naturally, this kind of publicity and potential vote winning outrage leads to political hyperbole and legislative change. Now; more than ever, if you are found to be evading taxes you can expect the harshest ever treatment by HMRC and possibly by the courts.

The cost of tax evasion to the UK government

During the 2017 tax year HMRC estimates that the total cost of tax evasion to the UK exchequer was in excess £5 billion. The maximum penalty for tax evasion in the UK is up to 7 years in prison and / or an unlimited fine. There is more to add

But how worried should you really be if you feel that you are guilty of tax evasion?

HMRC prosecute around 1000 taxpayers each year. These criminal penalties are reserved for the most serious cases of tax fraud or evasion. If you put those numbers in context, you can see that criminal prosecutions are still relatively rare. However, HMRC has an ongoing programme of increasing its criminal investigation resources. The prosecution statistics are only going to increase as a direct consequence. If you feel that you have a case to answer now is the time to come forward a disclose any irregularities to HMRC before they catch up with you.

We have put together a brief guide to remove some of the myths regarding tax evasion and the penalties you may face should HMRC catch up with you. Let us begin with a definition of what tax evasion is.

What is tax evasion?

Tax evasion in the UK is most easily explained as the deliberate, non-payment of a tax or duty to HMRC. There are many different types of tax evasion that fall within that broad description.

The most common examples include:

  • The deliberate concealment of income
  • The deliberate understatement of income
  • The deliberate overstatement of expenses
  • A failure to notify HMRC of chargeable income

Tax evasion can be perpetrated by individuals, businesses and trusts. There is also the added complication of organised fraud by criminal gangs; including the evasion

Tax avoidance as distinct from tax evasion often occurs due to human error. Poor record keeping, failing to file a tax return on time and failing to register a new business are all examples of tax avoidance arising from mistakes, though you can still be prosecuted if HMRC suspects that it was deliberate and not an honest mistake.

What are the possible penalties for UK tax evasion?

Penalties for tax evasion can be criminal; financial or both. It remains the case that the majority of cases of tax fraud or evasion are dealt with via HMRC’s civil procedures. We have written detailed guidance on the investigation of suspected tax fraud and evasion; which you can read by visiting the links below:

HMRC will prosecute you for tax evasion if they feel that it is in the public interest to do so. Their primary objective is to send out a clear message; to create a deterrent. Should you be found guilty of tax evasion you could well face a prison sentence; depending on the nature and scale of the offences committed. The courts have sentencing guidelines; but of course, every case is different. Below are examples of possible penalties for tax evasion:

Income tax evasion penalties

Summary conviction carries a 6 months prison sentence or a fine up to £5,000. However; more serious cases of tax evasion can result in sentences of up to 7 years in prison with unlimited fines. We have also sentences increased if the taxpayer fails to pay back the tax evaded. The maximum penalty for income tax evasion in the UK is seven years in prison or an unlimited fine.

VAT evasion penalties

In magistrates court the maximum sentence is 6 months in prison; with fines up to £20,000. Larger cases of tax evasion; that end up in the Crown Court attract stiffer sentences of up to 7 years in prison and unlimited fines.

Cheating the public revenue

This is the criminal charge most often levied by HMRC in cases of serious tax evasion. The maximum sentence for this offence in the UK is life in prison and / or an unlimited fine.

Producing false documentation during an HMRC enquiry

Magistrates court or as a summary conviction. HMRC tax evasion penalties can range from a fine of up to £20,000 or up to 6 months in prison.

Smuggling – evasion of duty

The maximum UK sentence is a fine up to £20,000 – magistrates. Cases meeting Crown court standard can result in a jail term of up to seven years and / or unlimited fine.

What is the difference between tax evasion and tax avoidance?

Going back to the 1970’s. the then chancellor of the exchequer Denis Healey, described the difference between tax evasion and tax avoidance as simply the thickness of a prison wall.

Memorable rhetoric; but just how much truth is there in that statement today?

Well in theory tax avoidance is perfectly legal. Most accountants would argue that it is simply arranging their client’s affairs in the most tax efficient way possible. After all; we would all love to pay less tax legally. In recent years the negative publicity afforded to some of the larger corporations; who have been taking advantage of legal tax loopholes to avoid UK taxes has seen something of sea change in public perception. Most would view large scale tax avoidance; legal or not, as sheer greed. Others take a much harsher view.

This type of publicity storm; invariably sees governments bowing to pressure and a stiffening of the laws. HMRC now adopt a much more aggressive approach when tackling tax avoidance and tax planning arrangements; with many being subject to proceedings under the serious fraud provisions available to them under Code of Practice 9. Aggressive counter avoidance in particular; can be viewed as deliberate fraud. In short, the lines between tax evasion and tax avoidance have become somewhat blurred. Cases that would have previously been dealt with under COP 8 are now being investigated under COP 9. It really is not a dice you should wish to roll. There is an old saying which applies perfectly here. If something seems to good to be true; it probably is.

How do HMRC investigate tax evasion?

The vast majority of HMRC investigation cases of tax evasion are conducted using HMRC’s civil powers. The penalty regime is also civil; whereby HMRC levy a financial penalty according to the nature and scale of the irregularities identified. Penalties are mitigated according to levels of cooperation and disclosure.

If you are selected for tax investigation; it is almost certain that HMRC suspect that tax has been evaded. HMRC conduct a very intensive case selection process before launching any investigation; making use of information available to them via third party sharing, internal and external systems, database analysis the internet and of course informants.

Database analysis

Following on from any interrogation of the various systems highlighted above; HMRC bow se an incredibly sophisticated piece of software referred to as “Connect”.

This is effectively a database used to connect the dots within all the various searches made by HMRC; to check that you are declaring all of the income that you should be. If you are committing tax evasion; the chances of HMRC catching up with you are greater than ever.

Other sources

A small percentage of HMRC investigation cases come from informants. These could be former business associates; disgruntled ex-spouses, irritated neighbours or even family members.

The countries increasing obsession with Twitter, Facebook and other forms of social media is also something HMRC will take advantage of. Social media outlets are often used as strong lifestyle indicators. So; what may seem like an innocent Tweet regarding the holiday of a lifetime, can easily be interpreted as something else entirely.

Offshore tax evasion

We have covered this in many previous articles. If you hold offshore accounts or assets resulting from tax evasion in the UK; HMRC will likely hold third party information obtained from foreign jurisdictions. There have various offshore disclosure opportunities offered by HMRC. If you have not already come forward and made a disclosure; now is the time to do so. If you fail to do so; HMRC will likely pursue you using the serious fraud provisions outline at Code of Practice 9. Worse still you could find yourself under criminal investigation.

If you have any questions or concerns regarding tax evasion and the penalties available to HMRC please give do give us call on 0330 999 5000. The help you need is right here and our initial advice is free