UK Tax Evasion Framework

This coursework will critically evaluate the appropriateness and effectiveness of the United Kingdom’s legal framework as well as enforcement policy combating tax evasion. It will start by providing definitions, then move on to deliver different types of tax evasion (TE) with their extent as well as draw a connection to the quote provided. The main focus of this coursework will consist of looking at regulatory bodies primarily HM Revenue & Customs (HMRC), issues and perhaps need for reforms which will be provided under the recommendations. The coursework will stipulate weaknesses and provide the real-life examples to show the UK’s and international efforts for reducing TE. Significant number of publics want more meaningful prosecutions not just ‘low-hanging fruits’ being harvest. This paper will show the huge scale of this weighty problem and draw connection to more financial crime matters and weaknesses of the UK’s regulations. It will also, argue for DPAs being inadequate enforcement tool, since they do not prevent future TE by the individuals, corporations and banks.

Tax fraud – avoidance, evasion

To start with, it is essential to provide the definition of tax fraud together with distinction between tax avoidance and TE. Tax fraud is a white-collar crime, which has long been not a significant one for courts and criminologists. Its control and punishment have become politicised and the subject of public debate, which is not a surprise. It is important to separate tax avoidance from TE, as these two cannot and should not be categorised or dealt with in the identical way. Tax avoidance in very simple terms is the reduction of tax, that the individual or the company pays by legal methods. HMRC defines it as avoidance, that involves: ‘bending the rules of tax system to gain tax advantage that Parliament never intended’. It can occur where legitimate means are used to reduce a tax liabilities, examples include tax-free individual saving accounts, artificial transactions which abuse gaps in the law but are not within the spirit of law. Best definition of TE was given by HMRC: ‘tax evasion is an illegal activity, where registered individuals or businesses deliberately omit, conceal or mispresent information in order to reduce their tax liabilities’. It can be easily achieved by the individual or the companies by means of misrepresenting income, overstating deductions.

Offences of tax evasion

Primarily, there are three different types of offences under TE: evasion of income tax, evasion of value added tax, evasion of corporate tax. First offence of evasion of income tax provided with a short definition that can be found under section 106A of Act. This offence is committed, when an individual is ‘knowingly concerned in the fraudulent evasion of income tax by that or any other person’. Second offence is an evasion of value added tax. It can be found under section 72 of Act with four main offences under it. This evasion has recently become an urgent concern within the EU.

Third offence is an evasion of corporate tax, where a huge number of taxes is being evaded by the corporations, however, it lacks a clear statutory definition. Nonetheless, one given in Stephen’s Criminal Digest seems to provide a suitable authority ‘occurs when someone fraudulently obtains the property of another by any deceitful practice . . . which is of such nature that it directly affects, or may directly affect, the public at large’. This offence is tied with common law offence of cheating the public revenue defined in a case of Less, it does not require a false representation either by words or conduct. Cheating include any form of fraudulent conduct which results in diverting money and depriving money from HMRC, through which it is entitled. Recently, it was concerned in a case of Lunn, where the accountant of TV celebrities has been convicted of evading tax for more than £6m. Moreover, an offence of cheating the public revenue is generally used for a high-profile individuals or scams, where the maximum penalty of seven years is thought to be inadequate. Significant, example of, the ring leader involved in an attempt to defraud more than £176m in VAT, through complex mobile phone trading scams, was sentenced to 17 years. Loss suffered by HMRC was estimated at £107 million.

The extent of tax evasion

Fundamentally, TE has a long history, as people are greedy and often try to evade tax to keep as much to themselves as possible. On the other hand, the people see tax as a good and essential fuel for country to run it with prosperity and wealth. TE is weakly criminalised and is frequently associated with a shadow economy, which exists alongside a UK’s official economy. It is linked to all the unregistered economic activates that would normally contribute to the official gross national product. HMRC attempts to measure extent of TE by use of tax gap, which put the total at £33 billion for 2016/17, representing 5.7% of total tax liabilities. Estimate for 2017/18 is around £5.3 billion for the UK’s tax gap due to tax evasion. Figures from past years are staying at a comparable level each year, in which, it can be argued that, the UK policy and regulatory bodies are not effective as numbers are not plunging. Importantly, to link tax gap with quotation is the fact that the vast and persistent tax gap links with ‘increased public appetite to prosecute tax evaders in the UK’. Tax fraud control and punishment has always been an endless political and public debate.

Legal framework and enforcement policy.

The UK’s policy aims at maintaining a balance between the respect for the ‘free market’ and the public demand for repression of tax evaders. It is administered by HMRC and HM Treasury. Different legislations are applied to different types of evasion. Evasion of income tax is primarily governed by Act, evasion of VAT is administered by Act. Additional Acts governing matters of tax fraud are Act, Act, Act and Code. Common Law offences include but are not limited to cheating the public revenue and conspiracy to defraud both preserved by Act. Case of Ghosh established two-stage test that almost all TE offences require proof of dishonesty. Where defendant’s conduct must be considered as dishonest to the ordinary standards of honest and reasonable people. The defendant must also realise that his conduct would be regarded as dishonest. Ghosh test failed in case of Roberts. What is more the test was redefined in case of Casino. The Court stated: ‘individual’s knowledge or belief as to the facts and then determine whether his conduct was honest or dishonest by the standards of ordinary people’. In addition, Mr Parkinson stated that, this decision is significant and will lead to more convictions in criminal trails. Besides, it has to date been difficult to attribute criminal liability to a corporation where such instances occur. Significantly, introduction of new criminal offences in connection to facilitation of TE under Act. The new offences will be committed, where the corporation fails to prevent an employee from criminally facilitating evasion of tax within UK. Crucially, this legislation does not seek to amend what is criminal, rather, it widens the scope as to who can be held accountable. Consequently, corporations can be held criminally liable for the acts of their employees. Moreover, new offences are a strict liability offense, thus there is no need for courts to establish that, the corporation in question knew about TE happening – fines are not limited in legislation. This is a positive and progressive step in respect of public appetite to go after ‘big boys. However, when corporation has put in place reasonable procedures created to prevent facilitation of TE by an employee, it has a substantial defence and this is where, it can be argued that, the corporation will undoubtedly do it to escape liability.

Fundamentally, HMRC is the main body tackling TE within the UK. It was established by virtue of the Commissioners and Act, which merged the Inland Revenue and HM Customs and Excise. Its duty is to ‘administer the tax system, including the management and reduction of risks to tax revenue’. HMRC’s main task is to collect tax payments and act as custom authority. Its authority covers income tax, VAT and national insurance. Additionally, HMRC has a number of objectives including but not limited to maximise revenues and bear down on evasion and avoidance, transform tax and payments for its customers. HMRC is given extensive powers to prosecute evaders, moreover, Act, supported by the Regulation, provides tax authority with supervisory power over money services business, companies, accountancy firms and estate agencies. It can make an arrest, search evaders and their premises, apply for search warrants, apply for production orders. HMRC is not responsible for criminal prosecutions, consistently, CPS decides whether to bring a criminal prosecution.

Majority of prosecutions are made of people, who refuse to cooperate with HMRC or refuse to ‘obey’ the law. That is why ‘blue collars ‘are their regular target as their evasion is not complex and easy to prove. It can be argued that, HMRC prefers to go after ‘low-hanging fruit’ and make them a main focus. Furthermore, these ‘fruits’ brings a high chance of leading to guilty plea and avoids an expensive trail for which HMRC recover a little. Tax authority’s Affluent Unit is an additional expansion of HMRC’s power. Unit targets a ‘high net worth individuals’ who use tax avoidance and evasion schemes and many more. Consequently, Unit proved to be extremely effective with netting 60 per cent more money in 2014 than in 2013. Unit is consequently expanding. Sadly, HMRC’s punitive approach is associated with the fact that, large corporations remain protected from prosecution, whereas individual tax offenders are the main target which bring back the issue of going after ‘low-hanging fruits’. Nevertheless, HMRC announced a new focus on investigating serious and complex tax crime with their promise to prosecute 100 wealthy individuals and corporations by 2020. HMRC has always been keen on prosecuting evaders and to hold corporates accountable. Although, it is not that significant as number of prosecutions are not growing, nor evasion scandals are dealt promptly. In the light of, new criminal offence of corporate failure to prevent the facilitation of evasion number of convictions may raise.

Cultural norms can be a challenge to legal enforcement, as it has been suggested by DeBacker that, CEOs of corporations from countries with higher corruptions norms evade more tax. Which might be the case with HMRC’s agents and their decision-making factors. If that is a case Act will play a significant role with prosecution of agents and CEOs. With all of the above in mind, it is worth mentioning with significant examples of the HMRC’s inadequate and adequate efforts of combating TE. First, Swiss and the UK tax agreement which was hoping to recover £3.2bn and only managed to collect £747m. Second, draws a connection to Panama Papers offshore TE scandal in which HMRC received a criticism for letting ‘big multinationals off the hook’ and leaving ‘an impression that the rich can get away with tax fraud’.

Third, HSBC’s Swiss subsidiary data leak by whistle blower Mr Falciani which contained information about the UK taxpayers holding Swiss HSBC accounts. In result 3,600 people and businesses were identified with more than 120 being high net worth individuals of which 40 per cent were already under HMRC enquiry for offshore assets. In result only one individual Mr Shanley was prosecuted and fined £400,000. This case brought little attention and again suggested HMRC’s sympathy for ‘low-hanging fruits’ as well as government ‘too scared to prosecute’ banks and issue of HSBC being ‘too big to fail, too big jail’. Doctrine of identification made it difficult for HMRC to find a person with ‘controlling mind’ within Swiss HSBC entity. Often foreign jurisdictions hold British bodies liable where HMRC has not. This was the case in RBS tax evasion enquiry, where it was required to pay £17.3m to settle this enquiry carried out by German authorities into their Swiss subsidiary.

Fourth, includes examples relying on authorities such as Thomhill and Aziz, in which court held if there had been TE defendant need to be prepared not only to pay the owed tax with penalty, but additionally to serve a term of custody. Here evading VAT by a Queen’s counsel who was convicted of cheating a public revenue by his failure to pay VAT for 12 years. He was sentenced to three and a half year years imprisonment. Similarly, Woolfenden also evading VAT using online trading was sentenced to two years in custody, Careswell, 12 month in custody for TE of approximately £50,000 , Lewis for failure to register as self-employed was sentenced to 18 months for evading income tax.

Recommendations

Initially, there is a significant need for global effort to reorganise international tax rules to keep in time with the digital era giants such as Google which has pushed international tax rules to their edge. This necessity was stipulated on public hearing by head tax policy of OECD Mr Pascal. Furthermore, as per Law Society high penalties, naming and shaming tax evaders are appropriate. However, as per McBarnet the taxpayer’s ability to avoid the label of criminal that has been institutionalised, hence, it would be better to make more significant media coverage on national and international level rather than just using ‘most wanted’ gallery on Flickr and media cover occasionally. Consequently, label of criminal will be more powerful. What is more, there is a need for government to take a step-in connection with how to address corporate liability for economic crime as well as a likelihood of applying the ‘organisational failure to prevent’ in the Act to a wider range of economic crimes. Furthermore, Professor Wells argues that Act’s toughness is mitigated by its own guidance on how corporations can demonstrate their implementation of adequate procedures to prevent bribery. It gives the corporations effective ways to escape prosecution. Subsequently, it enforces the view that policy is not effective. Necessity for HMRC to stop of the ‘Disclosure Facilities’ used to grant amnesty to evaders who agree to voluntarily reveal their TE and disclose their hidden assets. There should be no place for discussion, amnesty or any other way to change the course of law. Fully prosecute wealthy individuals, corporations without any discussion thus, placing white-collar criminals as priority and keep them equal with ‘blue collars’. HMRC needs to stop being naïve with certain professions especially lawyers- ‘Lawyers are the only persons in whom ignorance of the law is not punished’. Certain lawyers use their skills to make tax fraud look like errors and therefore not bearing any consequences.

Conclusion

In order to conclude all of the above, the United Kingdom’s legal framework and enforcement policy does not provide to be effective nor appropriate for tax evasion frauds and scandals. New targets and new legislations are being introduced but numbers of successful prosecutions are not growing. It shows HMRC’s appetite for ‘low-hanging fruit’, where it is easy to prove, however, not focusing on ‘big boys’ with more significant evasions committed. Public has an appetite for more prosecutions, still, HMRC target is a number not a size of tax evader which is not a surprise. New legislation that was thought to bring more prosecutions brought its own guidance, which can be read: ‘how to avoid prosecution for your corporation and carry on evading tax’. Finally, there is a need for international cooperation and focus on digital era ‘big boys’ as well as reforms within HMRC targets which above section of recommendations stipulated.

Bibliography

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James Fitzjames Stephen, A Digest of the Criminal Law 9th ed. (Sweet & Maxwell: London, 1950, 362)

N Ryder and K Harrison, The Law Relating to Financial Crime in the United Kingdom (2nd edn, Routledge 2017)

P. Alldridge, ‘Tax Avoidance, Tax Evasion, Money Laundering and the Problem of ‘Offshore’’, S. Rose-Ackerman, P. Lagunes, ‘Greed, Corruption, and the Modern State- Essays in Political Economy’, (Chapter 13, Elgar, 2015)

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Williams A (ed), ‘OECD Seeing Less Corporate Opposition to Digital Era Tax Revamp’ (ca.reuters, March 12, 2019)

Celia Wells, 'Corporate failure to prevent economic crime - a proposal ' [2017] 2017(6) Criminal Law Review

Celia Wells, ‘Who’s afraid of the Bribery Act 2010?’ [2012] 2012 (5) Criminal Law Review

Doreen McBarnet, 'Whiter than white collar crime: tax, fraud insurance and the management of stigma' [09/1991] 42(3) The British Journal of Sociology

Jason Debacker, 'Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States' [2015] 117(1) Journal of Financial Economics

Katia Weidenfeld, 'Punishing tax offenders in France and Great Britain: Two criminal policies' [2017] 24(4) Journal of Financial Crime

P. Alldridge, ‘Tax Avoidance, Tax Evasion, Money Laundering and the Problem of ‘Offshore’’, S. Rose-Ackerman, P. Lagunes, ‘Greed, Corruption, and the Modern State- Essays in Political Economy’, (Chapter 13, Elgar, 2015)

HMRC press notice, Low tax gap results in £71 billion for UK public services, 15 June 2018; see also, HMRC, Calculating the 2016-17 Tax Gap: Issue Briefing, 14 June 2018