All businesses and individuals are required to pay tax. Individuals typically pay income tax and National Insurance, while companies may need to pay corporation tax, VAT, tax on dividends, or capital gains tax.
Failing to pay taxes can be classified as either tax evasion or tax avoidance, depending on the situation. This article explains the difference between the two and provides examples of each.
In recent years, the UK government has taken a stricter stance on tax evasion and avoidance. The Criminal Finances Act 2017 introduced a new corporate offence for failing to prevent tax evasion by associated individuals.
HM Revenue and Customs (HMRC) has also increased efforts to target tax avoidance schemes, aiming to hold those who exploit them accountable.
What is Tax Evasion?
Tax evasion happens when someone intentionally avoids paying the taxes they owe. This requires a deliberate decision, also known legally as “mens rea” or a guilty mind. It cannot happen by accident or through carelessness.
Tax evasion, also called tax fraud, is a criminal offence. HMRC Fraud Investigation Services (HMRC FIS) is a specialist unit that handles these cases. Depending on the severity, HMRC FIS may investigate tax evasion as either a criminal or civil matter.
Tax Evasion and Tax Avoidance
Tax avoidance is using loopholes in the system to pay less tax. Tax evasion, on the other hand, involves hiding income or information from HMRC and is illegal. The line between the two can be thin. HMRC has shut down several tax avoidance schemes, considering them to be forms of tax evasion.
Methods of Tax Evasion
Here are some common examples of tax evasion:
- Under-reporting income to HMRC: Declaring less income than was actually earned results in paying less tax than required.
- Hiding money or assets overseas: Moving assets offshore can reduce tax obligations. Sometimes, this is done secretly to avoid paying tax altogether.
- Paying workers in cash: Paying “cash in hand” allows people to avoid reporting income, so no tax or National Insurance is paid.
- Claiming personal expenses as business expenses: Items bought for personal use, like meals or entertainment, may be falsely reported as business costs to claim tax refunds.
- Using company property for personal reasons: Using business equipment for personal use without reporting it can lead to unpaid tax on these benefits.
Real-Life Tax Evasion Examples
Tax evasion happens when someone knowingly files incorrect tax returns, leaves out taxable income, or makes up deductions. Failing to register for or submit tax returns on purpose is also considered tax evasion or fraud.
Operating as a ghost trader or through the black market is another example of tax evasion.
One of the most common forms involves VAT. Some businesses avoid registering for VAT when they reach the threshold or falsely claim input VAT to get a repayment. HMRC often checks businesses that frequently claim VAT repayments or submit unusual claims.
If you think HMRC suspects you of filing a false claim, underpaying, or overclaiming VAT, seek expert advice right away. Buzzacott’s tax investigations team can help fix mistakes and reduce penalties.
Legal Risks of Tax Evasion
Criminal Offences for Tax Evasion
Tax evasion covers a range of illegal activities, including:
- Not reporting all income
- Hiding assets
- Falsifying or omitting financial records
- Claiming tax benefits you’re not eligible for
- Committing VAT carousel fraud
- Underreporting VAT liability
- Failing to pay PAYE for employee wages
- Smuggling
Tax Evasion Penalties
Penalties for tax evasion depend on the type, amount, and duration of the offence. Minor cases are handled in a magistrates’ court, where offenders can face fines of up to £5,000 or up to six months in jail. Serious cases are sent to the Crown Court, where the maximum penalty is seven years in prison and an unlimited fine. Offenders may also be ordered to pay the evaded tax plus any accrued interest.
In the Spring Budget 2023, the government announced plans to increase the maximum prison sentence for serious tax offences, such as tax fraud or evasion, from seven years to 14 years.
Investigations and Enforcement
HMRC and Tax Evasion
HMRC tax investigations review the tax affairs of individuals or businesses to ensure the correct amount of tax is being paid. These investigations, also known as tax audits or compliance checks, may focus on past or current records.
While some investigations are random, many begin due to irregularities in tax records or accounts. The outcome depends on the nature of these issues and other factors.
HMRC uses advanced software to analyse data, compare returns across sectors, and flag unusual activity. If selected for an investigation, taxpayers will receive a letter or call outlining the reasons for the review.
Common triggers include failing to disclose income, underpaying tax, or overstating expenses. HMRC may request specific documents such as tax liability records, accounts, tax calculations, self-assessment details, company tax returns, PAYE records for employers, and VAT returns for VAT-registered businesses.
Penalties can range from minor fines to legal prosecution. It’s strongly advised to seek help from tax professionals to navigate the investigation process and address any issues effectively.
Steps in Tax Evasion Investigation
The process of an HMRC tax investigation typically follows these steps:
1. Opening a Tax Investigation
HMRC does not immediately inform individuals when their finances are being reviewed. If a formal investigation begins, HMRC may send a letter requesting additional information. Investigations usually start within 12 months of the tax return deadline or 12 months after the return was submitted if it was late.
2. Notification of Investigation
Tax investigations begin with a letter or phone call from HMRC. The letter explains whether they are looking at specific areas of the tax return or conducting a full review. If taxpayers disagree with the investigation or its focus, they can opt for alternative dispute resolution (ADR) at any stage to resolve the disagreement.
3. Providing Documents
The records HMRC may request depend on the nature of their investigation. For digital records, HMRC can ask for access to the software used and a copy of those records. Commonly requested documents include:
- Bank and credit card statements
- Sales and purchase invoices
- VAT and payroll records
- Expense receipts
- Copies of emails and other correspondence
- Quotes, pricing estimates, and job-related documents
4. Interviews
HMRC may ask for an interview, but this is often avoidable if the required information is provided in other ways. In serious cases, such as suspected tax crimes, HMRC may request an interview under caution or even arrest individuals. It’s advisable to have legal representation for these situations.
5. Investigation Outcomes
The investigation ends with a decision notice or a contract settlement. A decision notice is sent as a letter detailing HMRC’s findings and may include penalties or tax assessments. A contract settlement is a legal agreement where the taxpayer pays what’s owed, and HMRC agrees not to take further action.
Potential outcomes include:
- Overpaid Tax: A refund with interest is issued.
- Underpaid Tax: The taxpayer must pay the owed tax within 30 days, possibly with interest.
- Deliberate Misconduct: If wrongdoing is found, HMRC may pursue criminal action and impose penalties. The severity depends on factors like the reasons for underpayment, how quickly errors were disclosed, and cooperation during the investigation.
Offshore Tax Evasion Cases
Offshore tax evasion is a serious offence with harsh consequences. It involves hiding assets or income in offshore accounts to avoid paying taxes. Those found guilty can face severe penalties, including large fines and prison time. A conviction can also harm personal and professional reputations. Offshore tax evasion can negatively impact both financial stability and social standing.
Consequences of a Guilty Verdict
Financial Loses
A tax evasion conviction in the UK can lead to serious financial consequences. Fines, penalties, and legal fees can quickly drain your finances. Authorities may also seize and sell your assets to recover unpaid taxes and interest. Understanding these risks is important to ensure you comply with tax laws.
Reputation Risks
A tax evasion conviction can harm your career, professional license, and reputation. Licensing boards may suspend or revoke licenses for those convicted. It can also make it harder to get a job or secure a new professional license.
On a personal level, it can bring embarrassment to you and your family. For businesses, a tax evasion conviction can lead to consumer backlash, damage their reputation, and lower their brand value.
Ongoing Legal Issues
Tax evasion in the UK can lead to serious legal problems. These may include fines, penalties, and expensive legal disputes. To avoid this, ensure you follow tax rules carefully. Keep accurate records and seek help from professionals to reduce the risk of issues.
Preventing Tax Evasion
Ensuring Tax Compliance
For UK businesses, staying compliant with tax regulations requires careful attention. Here’s how to protect your company from tax avoidance risks:
- Stay updated on tax law changes and consult professionals to understand their impact on your business. Regular audits can help with this.
- Keep accurate financial records and share all necessary information with HMRC to show transparency and commitment to compliance.
- Work with ethical tax advisors who follow professional standards. Avoid those pushing risky tax schemes that could lead to legal issues.
- Set up strong internal controls to monitor tax-related activities. Regular reviews can help spot and fix compliance issues.
- Create a clear tax policy that outlines your company’s approach to meeting tax obligations. Share this policy with staff and stakeholders to build trust.
- Be cautious with high-risk transactions like complex cross-border deals or those involving tax havens. Always assess the tax implications thoroughly.
- Consider voluntary disclosure programs from HMRC to address past mistakes and reduce penalties. Proactive action shows a commitment to compliance.
Role of Tax Lawyers
If HMRC is investigating you for unpaid or underpaid taxes, it’s crucial to seek help from a skilled tax lawyer or solicitor. How the investigation is handled early on can significantly affect the result and help avoid lengthy, reputation-damaging legal cases.
Whistleblower Reporting
Tax authorities run whistleblower programs that allow people to report tax evasion anonymously through hotlines. Whistleblowers can receive financial rewards, helping authorities take quick action to stop tax evasion.
FAQs
How is tax evasion identified during an audit?
Tax evasion is measured using two methods: the tax evasion rate and the tax gap. Once the level of tax evasion is determined, financial statement variables are analysed to understand the financial traits of tax-aggressive firms.
What happens after allegations of tax evasion?
Authorities are investigating allegations of tax evasion in the UK. If proven guilty, the consequences can include fines, penalties, and criminal charges. Those involved may also need to repay the evaded taxes with interest. Addressing these cases helps protect the fairness of the tax system for all taxpayers.
Are there programs to report suspected tax evasion?
Use the online form to report what you know about a person or business to HMRC. Providing your name, location, and contact details can help HMRC reach you for more information if needed. You don’t have to share your personal details, and anything you submit will stay private and confidential.
Don’t send extra documents. Let HMRC know if you have any when making your report, and they’ll contact you if they need it. For your safety, do not investigate further or tell anyone you’re making a report.
If you can’t use the online form, call the HMRC fraud hotline at 0800 788 887.
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