HMRC Serious Fraud Investigations
The functions of Special Civil Investigations (SCI) are to investigate:-
- Suspected serious fraud in business accounts, VAT, employer compliance and the construction industry and
- Dishonest accountants and tax advisers
referring cases to the Revenue and Customs Prosecution Office (RCPO) to be considered for prosecution where appropriate.
Prior to their merger to form HM Revenue and Customs (HMRC), the Inland Revenue and Customs and Excise had their own procedures for investigating serious fraud. The approaches differed, however, in one important respect. The Customs and Excise Civil Evasion procedures were recognised by the courts as civil proceedings. The Inland Revenue Hansard procedures, on the other hand, were held by the Court of Appeal to be criminal proceedings. Following the decision in R v Gill, Hansard interviews were held under caution and recorded.
The new Hansard approach that evolved after R v Gill was not considered to be satisfactory and the opportunity has been taken, with the merger of the Revenue and Customs, to introduce a common Civil Investigations of Fraud (CIF) procedure for HMRC for both direct and indirect investigations. The new procedures apply to all investigations started after 1st September 2005. The old Hansard procedures and Customs Notice 730 will continue to apply to any investigations started before that date. A new code of practice, Code of Practice 9 (2005), has been issued explaining the new procedures.
Since the merger, the Revenue’s Special Compliance Office (SCO) and the Law Enforcement Investigation section of Customs have been combined in a new HMRC office, Special Civil Investigations (SCI). In the first instance, the new CIF procedure was used only by SCI. From 1st July 2006 new teams of specially trained officers were formed by HMRC in Local Compliance and National Compliance to use the new CIF procedure.
Local Compliance teams operate out of:-
National Compliance has a capability within the Labour Providers Unit and in the Special Trade Investigation Unit. SCI will continue to investigate the very largest cases and the new CIF teams will only investigate those cases not undertaken by SCI. The application of the CIF procedure will be the same whoever uses it and will be subject to quality control by HMRC.
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Definition of Serious Fraud
There is no statutory definition of serious fraud. The only reference to ‘serious fraud’ in the tax legislation is contained in TMA 1970 s. 20C (1A):
’20C (1A) Without prejudice to the generality of the concept of serious fraud –
- Any offence which involves fraud is, for the purposes of this section, an offence involving serious fraud if its commission had led, or is intended or likely to lead, either to substantial financial gain to any person or to serious prejudice to the proper assessment or collection of tax and
- An offence which if considered alone would not be regarded as involving serious fraud may nevertheless be so regarded if there is reasonable ground for suspecting that it forms part of a course of conduct which is, or but for its detection would be, likely to result in serious prejudice to the proper assessment or collection of tax.’
HMRC’s view of fraud is outlined in its instructions to inspectors:-
‘Fraud (in relation to the Revenue) includes, in its various forms, falsification with an intention to deceive and this may be present even as a mere conscious understatement in, or omission from, a return or accounts.
Thus, the active intention to deceive may, on the other hand, be so slight that the falsification differs little from that resulting from carelessness or negligence. On the other hand, falsification may be deliberately planned with the clear intention of deceiving and cheating the Revenue by, for example, the omission, manipulation or invention of figures, or other records.’
The Dishonest Adviser
The dishonest accountant or other tax adviser is seen by HMRC as a centre of infection, whose activities must, in the public interest, be brought to an end as soon as possible. Hence SCI always take over any such cases on discovery and as a matter of priority. If it can be proved that the adviser has acted fraudulently, either in his own affairs or those of his clients, the following course of action against him will be considered:-
- Penalty proceedings in the High Court under TMA 1970, s. 100D and
- The negotiation of a penalty under TMA 1970, s. 99
The aim is to bring the fraudulent adviser’s activities to an end and the decision about how this might best be achieved is taken in the light of the nature of the offence, the quality of the evidence and the willingness of the adviser to allow access to his working papers (so that the investigator can find the extent of his frauds in relation to his clients).
While TMA 1970, s. 20A empowers HMRC to call for the working papers of an adviser where he has been convicted of an offence or had a penalty imposed on him under TMA 1970, s. 99, a negotiated s. 99 penalty does not enable HMRC to proceed under s. 20A. if he refuses access to his working papers, therefore, he is more likely to have formal proceedings taken against him.
The changes made by FA 1989, s. 144 to TMA 1970, s. 20B by the addition of subs. (9)-(14) enable HMRC to have access (subject to safeguards) to an adviser’s working papers where the client is under investigation by way of a notice under s. 20(3) or (8A). In most cases, evidence of any fraud on the part of a dishonest adviser is to be found primarily in the working papers relating to his clients.
If, as a result of an investigation into an adviser suspected of fraud, it is decided that there is insufficient evidence of the standard required for a criminal prosecution, it would be unusual for a s. 99 penalty to be determined by the inspector, with any appeal then to be heard by the commissioners, because the quality of the evidence required for this penalty needs to be of a standard almost as high. Instead, the action taken would probably be to negotiate a s. 99 penalty and to settle the matter by way of HMRC getting various undertakings from the adviser with regard to his future conduct.
A distinction must be drawn between fraud and incompetence; fraud is a criminal offence, incompetence is not. For an offence to be committed under TMA 1970, s. 99, therefore opening up the possibility of obtaining access under s. 20A to the working papers of the adviser, he must have known that the information, return, accounts or other document was incorrect. If, however, the adviser is not dishonest but only incompetent, he will not, of course, have known that the return, accounts, etc. were incorrect and HMRC’s action is limited to trying to persuade him to obtain assistance, seek training or perhaps retire or cut down on the number of clients. In extreme cases, the local tax office might be advised to treat every return submitted by the incompetent adviser as likely to be unsatisfactory and to open enquiries into them all.
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Fraudulent Evasion of Income Tax
Although there is no statutory definition of fraud and many tax prosecutions are mounted on the basis of the common law offences of cheat, a new offence of being knowingly concerned in fraudulently evading income tax has been introduced for actions or omissions on or after 1st January 2001 (FA 2000, s. 144). The evasion of capital gains tax and corporation tax remain, for the time being at least, outside the new prohibition.
The new offence can apply not only to the errant taxpayer, but to anyone who is knowingly concerned with the act. That could include any professional adviser, banker, spouse or business partner.
If the offence is tried summarily (e.g. in a magistrates’ court in England or Wales), the maximum penalty is a fine of £5,000 or six months in prison, or both. If the offence is tried on indictment (e.g. in the Crown Court in England or Wales), the fine is unlimited and the prison term can be up to seven years.
It is important for an advisor, faced with an Special Civil Investigation (SCI) investigation of his client, to understand the paramount importance of the group leader. The group leader does not normally work cases himself but he will be directly and intimately involved in all the cases worked by his group. It is the group leader’s job to:-
- Decide whether a case which has been referred by a district should be registered for SCI investigation
- Allocate cases to his investigators having regard to their experience
- Keep the progress of all the group’s investigations constantly under review and advise on steps to maintain progress, deciding if and when the prosecution becomes appropriate
- Attend any interviews likely to prove difficult and all settlement interviews
- To decide in most cases, on behalf of the Board, whether to accept the offer in settlement and
- Train inspectors when they join the group. Close involvement of the group leader may be expected where the investigation is being handled by an inspector new to SCI.
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Indications of Serious Fraud
Features considered by HMRC as indicating serious fraud (especially where there is a combination of such features) and which must be submitted to Special Civil Investigations (SCI) as soon as the feature (s) is recognised are:-
- False accounts have been deliberately drawn up and submitted to HMRC for the purposes of evading tax
- Documents used to prepare accounts or returns have been forged or other wise materially altered or falsified with intent to deceive
- There has been collusion between the taxpayer and others to defraud HMRC
- An accountant, solicitor or other tax adviser is suspected of acting dishonestly in his own affairs or those of his clients
- The taxpayer has been the subject of an earlier investigation and his statement of assets and/or certificate of disclosure has subsequently been discovered to be a false in a material particular
- The taxpayer has been the subject of an earlier investigation and subsequent to the conclusion of that investigation he becomes involved in further irregularities
- The taxpayer has a special status in the administration of justice or tax, e.g. government ministers, judges, magistrates and tax commissioners, or is a member of either House of Parliament
- There is suspected evasion using the vehicle of an offshore company involving false invoices or monies diverted offshore
- An informer appears to have valuable information about a suspected fraud or substantial evasion, whether or not he is seeking a reward
- Cases of phoenixism
- Cases of failure to notify chargeability or very late filing and
- Cases of serious PAYE irregularities
However, the presence of one or more of these indications does not meant hat serious fraud must have occurred, nor does it mean that the case will inevitably be worked by SCI; each case is considered on its merits. Furthermore, the involvement of SCI in a case does not always mean that serious fraud is suspected, since SCI also carry out other types of investigation. It is therefore important that the adviser establishes which SCI group is acting in the case.
SCI also has responsibility for receiving and passing on information exchanged with other Revenue authorities throughout the world. Information exchanged in this way has led to the recovery of millions of pounds which would otherwise have escaped taxation; a source of information that continues to grow in importance. However, it should be noted that SCI is not concerned with investigating tax avoidance across national borders by multi-national companies; this is the province of International Division.
SCI will also investigate non-accounts cases where false returns or statements have been made and substantial amounts of tax are involved.
The most significant change introduced by the Civil Investigation of Fraud (CIF) procedure is the removal of the underlying threat of prosecution, which was an integral part of the old Hansard investigation carried out by SCO. Where HMRC decides to investigate using the new CIF procedure, the taxpayer will be told at the outset that HMRC will not seek a prosecution for the fraud that is the subject of the investigation.
As a result of making the proceedings entirely civil, Special Civil Investigations (SCI) interviews will not be held under caution and nor will they be tape-recorded.
Finally, there will be a single meeting to discuss both direct and indirect tax matters. Pending the outcome of the ongoing review of HMRC powers, the powers relating to direct and indirect taxes remain separate and distinct. The meeting will therefore have to be structured so that the taxpayer is aware of what tax is being discussed and so that each tax is dealt with separately.
When the investigation is complete, the tax, interest and penalty in respect of both direct and indirect taxes will have to be negotiated. The way in which the penalty is calculated will depend on the return period:-
- For returns in respect of periods up to and including 31st March 2008, completed on or before 31st March 2009, the penalty will have to be negotiated separately for each type of tax
- For returns in respect of any period commencing on or after 1st April 2008, completed on or after 1st April 2009, the new penalty regime introduced by FA 2007 will apply in the same way to both direct and indirect taxes.
The threat of prosecution is only lifted in respect of the fraud itself. Having been given the opportunity to make a complete disclosure, the taxpayer who, in the course of a civil investigation, makes materially false statements or provides materially false documents with the intention to deceive will still face the possibility of a criminal prosecution. The prosecution would, however, be in respect of the deceitful conduct, not the deception being investigated.
If HMRC decides not to use the CIF procedure, they can instead refer the matter to the RCPO for consideration for prosecution where they consider it necessary or appropriate. The civil procedures are unlikely to be offered in the cases outlined in the prosecution policy statement issued by the Inland Revenue on 14th July 2004. Instead, HMRC would seek to mount a prosecution in respect of the deception itself.
HMRC are satisfied that the new procedures are compliant with the Human Rights Act 1998, and in particular art.6 which gives the right to a fair trial.
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New Code of Practice
The new Code of Practice 9 (2005) has been written to reflect the new civil procedure. It starts with a statement of the practice of HMRC in cases of suspected serious fraud:-
- The Commissioners reserve complete discretion to pursue a criminal investigation with a view to prosecution where they consider it necessary and appropriate.
- Where a criminal investigation is not considered necessary or appropriate the Commissioners may decide to investigate using the Civil Investigation of Fraud procedure.
- Where the Commissioners decide to investigate using the Civil Investigation of Fraud procedure they will not seek a prosecution for the tax fraud which is the subject of that investigation. The taxpayer will be given an opportunity to make a full and complete disclosure of all irregularities in their tax affairs.
- However, where materially false statements are made, or materially false documents are provided with intent to deceive, in the course of a civil investigation, the Commissioners may conduct a criminal investigation with a view to a prosecution of that conduct.
- If the Commissioners decide to investigate using the Civil Investigation of Fraud procedure the taxpayer will be given a copy of this statement by an authorised officer.
In the same way as the previous Code of Practice, it then goes on to outline the various steps of enquiry.
The earlier version of the Code of Practice had to deal inevitably with the need for a caution to be given under the Police and Criminal Evidence Act 1984 (PACE) and for interviews to be recorded while at the same time stressing that this did not mean that the Inland Revenue wished to mount a prosecution. The new version states categorically that ‘the investigation is not being conducted with a view to your prosecution for fraud’. Having placed it squarely in the category of civil procedures, there is then no need for a caution or for interviews to be recorded.
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Each fraud investigation group comprises six or seven investigators with two or three accountants. The investigators are drawn from fully trained officers who have shown a particular aptitude for investigation work. The team is headed by a group leader. The accountants will have had at least three years working in private practice, industry or commerce and their stay at Special Civil Investigations (SCI) is normally for the rest of their careers.
It will be appreciated form this that in an SCI investigation, the adviser is faced with a level of investigative expertise and experience greater than he will normally have met in any local tax office investigations he has handled. This, and the far more meticulous approach adopted by specialist investigators in line with the serious nature of the cases handled by the SCI, means that the adviser must adjust his own approach when working such investigations.
While some local tax office investigations may be speculative, with no hard evidence of omissions, SCI fraud investigators rarely take on a case unless there is at least substantial prima facie evidence pointing to the commission of serious fraud against HMRC. This accounts for the very high success rate in SCI fraud investigations and for the fact that the average settlement is well in excess of £100,000. As SCI select their cases for investigation very carefully, it is wise to assume that there is a case to answer and advisers should be wary of prematurely concluding that SCI’s suspicions are unfounded. It is unlikely that SCI would start an investigation where the tax perceived to be at risk is less than £150,000. Faced with an SCI investigation, therefore, the best advice the adviser can generally give his client is that he should co-operate in making a full disclosure. This is particularly so since failure to make a full disclosure may still lead to criminal prosecution for deceitful behaviour.
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Cases Dealt with by Special Civil Investigations (SCI)
The majority of the cases taken up for investigation are cases submitted by tax officers, or discovered by Special Civil Investigations (SCI) during a visit to a tax officer, because there are prima facie indications of serious fraud.
There are a number of cases taken up which arise out of information given by informers, but the biggest other source of cases is ‘spin-offs’ from other investigations by SCI. Investigation of the working papers of dishonest advisers is another fruitful source of cases.
In the great majority of the cases arising out of tax office submissions, omissions from returns or accounts will already have been established. Nevertheless, before SCI holds its opening interview, the investigator will carry out extensive research to ensure that there is a strong case for a formal challenge and for proceeding with an investigation even in the face of a denial of irregularities by the taxpayer.
Because the investigation of serious fraud requires specialised skills and facilities not available in local officers, enquiry officers in tax officers are under strict instruction that as soon as serious fraud is suspected the case must be referred to SCI immediately. Officers in local tax offices are specifically instructed not to refer to mitigation for co-operation leading to a pecuniary settlement nor to issue leaflet IR 160: any mention of co-operation might prejudice the possibility of a criminal prosecution. Neither should they make any reference to a payment on account.
Published statistics point to continuing tax evasion on a massive scale. The Inland Revenue’s Annual Report for 2003/04 showed that SCO investigations led to the recovery of £387.7m. SCO also mounted 110 prosecutions, 99 of which were successful and obtained seven confiscation orders for a total of £2.4m.
There is no HMRC code of practice governing the activities of the prosecution groups; prosecution cases are conducted in accordance with the appropriate criminal code.
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On 1st September 2007 Public Notice 160 (PN 160) was introduced. This sets out the procedure for civil evasion penalty enquiries for indirect taxes outside of Code of Practice 9 (2005).
The new procedure will only be operated by appropriately trained staff in designated teams. It is designed to be used in lower value cases where there is evidence of dishonest conduct.
The key features of this procedure are that:-
- The taxpayer will be notified that they are suspected of conduct involving dishonesty
- HMRC will disclose the matters that are subject to enquiry, for example sales or purchases in a particular VAT return period but not the specific evidence that leads them to suspect dishonest conduct and
- The taxpayer will be invited to co-operate with HMRC’s enquiries and to tell them about any irregularities. It will be explained to them how co-operation and disclosure can earn reductions from a maximum penalty of 100%.
This procedure will only be used where HMRC has evidence that leads to a suspicion of dishonest conduct.
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As a matter of policy the only cases accepted by Special Civil Investigations (SCI) for fraud investigation are those in which, after detailed review, it is considered virtually certain for serious fraud can be established. Cases are usually taken up for enquiry only after many weeks of research about which the taxpayer and adviser will, almost certainly, know nothing.
This does not mean that every suspected case of serious fraud will be taken on. Specialist investigators’ time is very expensive and the group leader is required to use his limited resources most cost effectively. So, when deciding whether to register a case, the group leader takes the following considerations into account:-
The strength of the evidence and the likelihood that it will yield a substantial settlement (the more speculative the case, the less likely it is to be suitable for registration):-
- What steps will be open to HMRC in the face of a denial by the taxpayer of any irregularities and a complete absence of co-operation
- Whether HMRC have enough ammunition in the way of evidence to invoke the information powers in TMA 1970, s. 20
- The chances of success before the commissioners in a contentious hearing
- If the case has been submitted by the tax office solely or mainly because of the level of omitted profits, whether specialist fraud investigation techniques would be likely to lead to a substantial increase in the settlement. Clearly, if there are no grounds for doubting that a full disclosure has been made to the local tax office enquiry officer, nothing would be achieved by the intervention of SCI (except that it has the resources to investigate the case more thoroughly than perhaps the office can). This, incidentally, should act as an incentive to a taxpayer who has substantially understated profits to make a complete disclosure on challenge by the inspector in the district. Not only will he earn maximum abatement of penalty for disclosure, and co-operation; he will also probably thereby avoid registration by SCI, and the expensive and intrusive investigation report which would then be required.
The size of the settlement:-
- No matter how large the understatements of profits might appear to be, whether the settlement (including tax interest and penalties) will be substantial or whether the additional profits will be covered by reliefs.
- Whether the taxpayer has left the country with no prospect of an early return
The penalty position:-
- Whether the offence is only failure to notify chargeability for years when the maximum penalty was £100 p.a.
- Whether the penalty position is uncertain because of doubts over the legal basis for making assessments and recovering a penalty for all the years concerned (e.g. in the case of a deceased taxpayer)
The means position:-
- Whether the taxpayer is going to be able to fund a substantial settlement
- Whether he would be able to make large instalment payments out of future income.