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KEY POINTS
- Criminal prosecutions for tax evasion are to increase.
- The Central Fraud Group of the Crown Prosecution Service now carries out tax prosecutions.
- The main Revenue offences.
- The court case and its procedure.
- HMRC’s ‘carrot and stick’ approach.
There has been much talk in the media and among politicians in recent months on the subject of tax avoidance and tax evasion.
The vital distinction between the two is that tax avoidance is the lawful arrangement of one’s affairs so as to reduce or avoid a liability to tax which might otherwise arise, whereas tax evasion is unlawful.
The recent announcement by the chief secretary to the Treasury that £900 million will be made available to HMRC to reduce non-compliance in the tax system and fund an intended five-fold increase in criminal prosecutions, means that more taxpayers and their advisers will find themselves at the sharp end of an investigation for tax evasion.
Investigations and prosecutions
HMRC are responsible for investigating suspected crime involving all of the taxes and other regimes for which the department is responsible. They do not, however, decide whether a criminal prosecution is to be commenced.
The decision to bring a criminal prosecution is made by an independent prosecuting authority. In England and Wales this was, until recently, the Revenue and Customs Prosecutions Office (RCPO).
But in January 2010, the RCPO merged with the Crown Prosecution Service (CPS) and tax prosecutions are now carried out by the Central Fraud Group of the CPS.
The CPS has a number of offences, which it can deploy to charge suspected tax evaders. These include:
- Fraud (Fraud Act 2006, s 1).
- False accounting (Theft Act 1968, s 17).
- Fraudulent evasion of VAT (VATA 1994, s 72(1)).
- Fraudulent evasion of income tax (FA 2000, s 144).
The above offences carry substantial prison sentences; for example, under the Fraud Act 2006, an offender may face a maximum of ten years in custody.
However, the main weapon of the CPS for dealing with serious tax evasion is the common law offence of cheating the public revenue, which is triable on indictment only, meaning it must be tried in the Crown Court before a jury.
The maximum penalty for cheating the public revenue is life imprisonment.
Typically, a tax prosecution will begin with an unannounced search of premises and seizure of evidence (more commonly referred to as a ‘dawn raid’ as it will usually start early in the morning).
Using powers provided under the Police and Criminal Evidence Act 1984 (PACE 1984) HMRC may:
- enter and search premises (PACE 1984, s 8 and Sch 1);
- require production of documents (PACE 1984, s 8 and Sch 1);
- seize items such as computers (PACE 1984, s 8 and s 19 and also Criminal Justice and Police Act 2001, s 50 and Sch 1); and
- arrest persons (PACE 1984, s 17 and s 24(2)).
Pre-trial processes
Often there will be a lengthy period after the raid, during which time HMRC will examine the documentation and other materials they have removed.
Many issues will arise during this period, one of the most pressing of which will be giving the affected person access to the material which has been seized; sometimes, investigators will be reluctant to allow this.
Having examined the seized material, HMRC will then decide whether the matter should be passed to the CPS with a view to criminal proceedings being brought against the suspected offender.
If HMRC are concerned that a suspected offender may leave the UK, perhaps because he is domiciled abroad, he will be arrested and appropriate bail conditions set.
All defendants aged 18 or over who are charged with a criminal offence will make their first appearance before the Magistrates Court. In most cases of serious fraud relating to tax the charge will be an ‘indictable’ offence, i.e. to be heard in the Crown Court, and the case will be referred to the Crown Court by the magistrates.
Prior to trial, the CPS is required to serve on the defendant all the evidence it will produce to prove the defendant’s guilt. The defendant’s legal team must then serve a statement, usually referred to as a defence case statement, setting out the nature of the defence and the matters of fact on which the defendant takes issue with the prosecution.
In cases of serious fraud, the court may also hold preliminary hearings to identify important issues for the jury and generally to help the judge’s management of the trial.
The trial
At trial, the jury will be sworn in. Prosecuting counsel will give an opening speech and will then call the prosecution witnesses who will give evidence and then be cross-examined by the defendant’s counsel. If necessary, they will be re-examined by prosecuting counsel.
If there are any disputes as to points of law or arguments as to the admissibility of evidence, a separate trial within a trial (known as a ‘voir dire’) will take place in the absence of the jury. The judge will make a decision once he has heard from counsel and any relevant witnesses.
At the end of the prosecution case, defence counsel will present the defendant’s case. If the defence is calling witnesses, an opening speech will be made to the jury first and then witnesses will be called on behalf of the defence to give evidence.
They will then be cross-examined by prosecuting counsel and then, if necessary, re-examined by defence counsel.
At the conclusion of the defence case, both prosecuting and defence counsel will deliver a closing speech to the jury and the judge will then sum up the issues of fact and law for the jury.
Finally, the jury retire to consider their verdict. They must decide their verdict unanimously although the judge will accept a majority verdict of 11:1 or 10:2 if unanimity is not possible after a period of time (Juries Act 1974, s 17).
Conclusion
The recent arrest of two British citizens on suspicion of using Swiss bank accounts at HSBC bank to evade tax is a warning of HMRC’s increasing willingness to pursue criminal prosecution in cases of suspected serious tax fraud. HMRC appear to be pursuing a carrot-and-stick approach to tax compliance.
The carrot has been HMRC’s willingness to offer tax amnesties, such as the offshore disclosure facility, the new disclosure opportunity, the Liechtenstein disclosure facility and now the plumbers’ tax safe plan.
The stick, for those who fail to take advantage of these opportunities and who continue to unlawfully shield assets offshore, is an increased risk of criminal prosecution. The future for tax practitioners is going to be very interesting as
this strategy unfolds.
Jonathan Levy is a partner at Reynolds Porter Chamberlain LLP and a former HMRC prosecutor. He can be contacted by email. Matthew Greene is an associate at Reynolds Porter Chamberlain LLP. He can be contacted by email.
