To prosecute or not? That’s the question

June 23, 2020

This article first appeared in Taxation, published by Lexis Nexis.

By Ian Whitehurst

One of the constants in our lives is taxation and another is people wishing to avoid or evade paying it. This article does not address the various legitimate avoidance schemes developed and marketed to allow people to limit their tax exposure.

The focus is instead upon the increasing use by HMRC of alternative methods of enforcing the payment of tax with associated penalties where they believe fraudulent or illegal activity has taken place. Just because they say so, does not mean it to be true, of course.

Fraud is one of the key growth areas of our ever increasingly digital economy whether it’s  committed by individuals, companies or organised crime groups [OCGs] and in the period 2017 – 2018 £5.3 billion was lost through tax evasion.

At £35bn, the government’s official estimate of tax losses is now the highest it has ever been in cash terms since figures were first published in 2008.

Yet the use of a criminal prosecution to combat, address and deter fraudulent activity has seen a steady decrease in the alleged illegal activity being charged by the investigative authorities resulting in criminal proceedings and trials, let alone convictions after being successfully prosecuted.

In the ten cases that concluded in the year to March 2020, only 17 of the 32 defendants prosecuted by the Serious Fraud Office (SFO) were convicted, giving a conviction rate of 53 per cent and only 11 new criminal investigations were opened in 2018-31st March 2019 by SFO.

The obvious question is therefore, why when tax loss is on the increase are HMRC apparently prosecuting less?

I believe that the reasons for this development are as follows:

Cost – a criminal investigation and prosecution can cost hundreds of thousands if not millions of pounds with no guarantee that those costs will be recovered through confiscation proceedings which of course are dependent upon the prosecution being successful and the Defendant still being solvent at the end of a case. Indeed, the recovery of costs is the exception rather than the norm and when orders are made they are usually only recovered after the amounts due under POCA and compensation orders, if any.  Criminal proceedings are therefore expensive, not particularly successful and result in very little gains for the treasury in relative terms.

Time – bringing a case to trial can take many months if not years from the initial complaint and investigation arising with the result that the parties, particularly the victims have mostly moved on;

Litigation risk – there is a tendency in the United Kingdom to overly complicate the presentation of fraud cases before juries leading in part to the low conviction rate obtained by the prosecuting authorities in financial and fraudulent misconduct cases and thus an aversion has built up within HMRC to the criminal trial process. This is of course understandable because when the HMRC launch a prosecution they want to make it as wide ranging and all encompassing as possible. This desire is often frustrated by the defence and indeed by the Court itself in an endeavour to streamline and simplify for the benefit of the jury who are to be burdened with the trial of such complex and often convoluted issues. Severance is often used and indeed encouraged to cut down trials and to reduce the scope of the prosecution. This whilst laudable in itself actually serves to frustrate the purpose of a large-scale criminal investigation and its desire to catch all within one net.

It may therefore very well be the case that there is a perception (rightly or wrongly) that HMRC consider that the cost / benefit analysis of long and complex criminal trials does not achieve the desired result of recovering lost tax. Such trials, when successful, do result in long prison sentences in some cases and this can be seen as an objective in itself. The actual recovery of the lost tax however seems better served in alternative recovery methods.

HMRC are still active in the investigation of fraudulent activity and quite rightly so for the same is a drain upon the public purse and resources to be deployed for the benefit of society as a whole. It appears however that alternative methods of enforcement seem to be preferred. A definitive answer can, of course, only be given by HMRC themselves but it appears that they now adopt in some cases a civil route for recovery through the Tax Tribunals.

The advantages of such a “civil” approach are numerous for HMRC – it is perceived to be a quick, cost effective and low risk way to raise monies through reclaiming tax/VAT monies (as well as the additional fines and penalties to be imposed) owed from perceived fraudulent activity. Additionally, the litigation risk if matters do go to a hearing are far more manageable than if the matters were to be tried by 12 members of a jury.

The perceived decrease in litigation risk for the HMRC is thus obviously attractive and the de–criminalisation of the process equally makes it attractive to individuals, companies and their advisers who are under investigation thus leading to the increased pressure to settle matters via a structured negotiation.

Whilst the HMRC may perceive the economic benefits of this civil tax tribunal approach and likewise the people subject to a tax investigation are no doubt equally relieved to be removed from the criminal process, there are still considerable issues that people should be aware of when they actively engage in the “civil” process.

In representing individuals subject to scrutiny by the HMRC the following key issues are always relevant whether it be in civil or criminal proceedings, settlement meeting or tribunal hearing.  Disclosure (or lack of it) by the HMRC is always a constant theme and  it is vital for them to realise that save in a COP 9 situation, disclosure is of great importance either on a voluntary basis or more likely by Court/Tribunal order in consequence of the proactive involvement of the client’s representatives ensuring that disclosure, transparency and openness works both ways.

Equally it is important to bear in mind the importance that if material has been seized during a criminal investigation it does not automatically become a tool that can be deployed by HMRC in any civil or regulatory proceedings. There are protections for the tax payer that prevent material seized being disclosed and / or used in any proceedings by HMRC. For instance, in a criminal investigation material may be seized which is subject to Legal Professional Privilege and thus cannot be used or shared by the investigators in any proceedings against the taxpayer.

Whilst we are on the topic of tax payer rights, it is important to bear in mind that the client has the right not to incriminate himself if there are concurrent civil and criminal investigations ongoing against the taxpayer. The exercise of that right prevents him from answering questions or being forced to give evidence in a civil matter when there is still ‘live’ criminal investigations or proceedings ongoing. If the HMRC persist in their intention to pursue a case in the tribunal whilst also running a criminal case, then active consideration must be given to applying to stay the proceedings in the tribunal until the criminal investigation or prosecution has finished.

Furthermore, the principle of parity is linked to the issue of disclosure. The approach   previously taken in linked or similar cases should be at the forefront of the minds of the client’s representative when an attempt is being made to resolve matters and comparative disclosure requests should be actively considered at the outset of the process as well when the matters continue to evolve.

The key principles of proportionality and totality should also be at the forefront of the decision making and settlement process whether it is by way of submission to a tribunal or a settlement meeting. In a recent case, a taxpayer who had been convicted for tax and VAT fraud under the CIS construction scheme, who served his sentence and paid his confiscation order in full was then faced with a separate but linked claim for a substantial sum of allegedly wrongly re–claimed VAT. Once more, criminal law principles of totality, proportionality, non bis in idem (the right not to be punished twice) and also arguments alleging abuse of process were deployed against the approach advanced by HMRC.

What can be seen from the above is that the skills, knowledge and legal principles developed in the criminal arena over some time are equally applicable where HMRC seek to recover in the Tax Tribunal outstanding monies bases upon allegedly fraudulent activity. It is of critical importance to remember that if a client is accused of criminal misconduct but is diverted into the civil process, it is simply not enough to be grateful and thankful that the risk of prosecution has been avoided. It is not the place nor time to simply “doff your cap” and reach for the chequebook.

It is thus important in the current climate to defend and protect the individual or corporate client’s rights as rigorously and as forcefully as possible. This approach must be developed, adapted and refined to meet the growing challenges that await in the civil arena as more and more tax cases are diverted into the settlement or tribunal route. The mere fact that a person is not to be charged, whilst itself a relief to the client does not mean that HMRC will be anything other than rigorous in the tribunal to recover what are regarded as outstanding monies. There is therefore considerable overlap between the on-going criminal investigations and the Tax tribunal recovery route.

Ian Whitehurst is a barrister at Exchange Chambers specialising in financial crime, crime and regulatory work. In financial crime matters, Ian has specialised for many years as Leading Counsel in the fields of Direct Tax fraud, VAT fraud, money laundering, false accounting and corporate misfeasance.