Call to arms on tax fraud

Tax fraud continues to morph and gain in sophistication. In 2019/20, the UK tax gap – the difference between the amount of tax paid and the amount owed by law – was 5.3%. While a small percentage, that equates to £35bn. As fraud continues to rise, corporates and individuals are being conscripted to help HMRC in the fight.

There are two strands to this redrawing of the battle lines. First, HMRC has expanded the ways in which it uses others to gather evidence. Second, the government is placing increasingly onerous obligations on businesses to self-regulate.

Burden on companies

Although the tax system relies on taxpayers providing information to the state via the self-assessment regime, the burden on companies to supply data has been growing.

In 2004, the disclosure of tax avoidance schemes (DOTAS) regime was introduced. This required members of the public to alert HMRC to arrangements involving a tax advantage, which could implicate those who play at the edges of avoidance or practise evasion.

Since then, other disclosure obligations have proliferated. These include international measures such as the European Council’s DAC 6 directive, which targets aggressive tax schemes used by businesses, intermediaries and individuals. Although this requirement has been scaled back significantly post-Brexit, it still indicates a wider trend.

Information is power

In addition, HMRC has the power to require taxpayers and intermediaries to hand over information or documents ‘reasonably required for the purpose of checking the taxpayer’s tax position’, through the information powers regime (schedule 36 of the Finance Act 2008). It continues to use this power with enthusiasm.

Taxpayer notices in particular can even be issued extra-territorially. This sweeping power is not afforded in other crime-fighting scenarios. (For example, in a recent case, the UK Supreme Court refused to allow the Serious Fraud Office to require a US company to supply information and data that it held abroad).

In addition, HMRC has just been awarded a similar but enhanced weapon for its armoury: the financial institution notice. It can now require banks, building societies and credit card issuers to hand over taxpayer data. There is no right to appeal. While it is not yet clear whether these powers operate extra-territorially, test cases are likely to ensue.

Interestingly, amid the statutory flurry, one role has gained little attention: the whistleblower. The UK does not have a formal tax whistleblowing regime. It is hoped that steps will be taken to develop a transparent regime to encourage those who have the most valuable information to step forward.

Corporates on the frontline

There has also been a cultural shift in the campaign against tax wrongdoing, with a greater burden now being placed on corporates to police their own employees and those they work with.

The introduction of a corporate offence of failure to prevent the facilitation of tax evasion (in the Criminal Finances Act 2017) is revolutionary. Unlike classic corporate offences, it does not require the state to prove that the ‘directing mind and will’ (often, the board) of the company was somehow complicit. Instead, if tax evasion occurs and was facilitated by an associated person (an employee, an agent or someone performing services for or on behalf of the company), then the company is liable, unless it can show that it had reasonable prevention procedures in place.

While no prosecutions have yet been brought, at the last count HMRC had 14 live investigations under way and a further 14 under review.

More targeted self-regulation measures have also been introduced, specific to certain industries and taxes. For example, new rules for online marketplaces render them the deemed seller for VAT purposes in certain transactions with an overseas element. The online marketplace is now liable for any missing VAT above that paid by the buyer unless it can prove it took ‘reasonable steps’ to ascertain the place of establishment of the seller, location of the goods at the time of supply, and that the amount charged was correct. This forces the marketplace to take responsibility for monitoring VAT compliance on the frontline.

Regulatory clampdown

There is a corresponding clampdown on those who fail to take such regulatory obligations seriously. In January 2021, HMRC announced its largest ever fine: £23.8m. While no money laundering took place, the money service business in question had breached regulations on risk assessments, policies and procedures, and customer due diligence. The fine was a warning shot – HMRC is taking action.

Fighting tax evasion is no longer a role restricted to agents of the state – everyone has been drafted in. However, businesses and individuals do not have unlimited resources to devote to the fight, and a careful balance will need to be struck. Besides, leveraging the taxpayer can be no substitute for HMRC boots on the ground; only HMRC has the focus, expertise and sight of all of the collated data necessary to tackle sophisticated tax fraud head on.