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New HMRC civil fraud policy gets mixed response

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19th Aug 2005
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As reported this week in TaxZone, HMRC has proposed a new civil procedure for investigating serious tax fraud starting from 1 September.

The new procedure is incorporated into a Code of Practice and will be used for investigating suspected serious cases of direct and indirect tax fraud. It will replace the Revenue's existing Hansard procedure and the Customs & Excise VAT 'New Approach'.

To recap on the key features of the new procedure:

  • The taxpayer will be given the opportunity to make a full disclosure of 'tax irregularities' (but HMRC will not reveal the details of its concerns at this stage.) There will be no underlying threat of prosecution for the original tax evasion, but HMRC will retain the right to prosecute if the taxpayer makes a materially false disclosure after agreeing to adopt the procedure.
  • If the taxpayer makes a full disclosure, HMRC will not undertake any active investigation. But if the taxpayer doesn't cooperate, HMRC will carry out a civil investigation, assess the tax, charge interest and impose a significantly higher penalty than if the taxpayer had come clean.
  • As the procedure will be wholly civil, there will be no PACE (Police and Criminal Evidence Act) safeguards, such as the formal caution and tape recording of interviews.
  • HMRC's new Serious Civil Investigation office (SCI) will handle cases, taking over the roles of the Revenue's Special Compliance Office (SCO) and its Customs equivalent.
  • Penalties and settlements will be negotiated separately for direct and indirect taxes, at least until the ongoing review of HMRC powers has been completed.

Although largely positive about the changes, the tax industry has some worries about the details.

The ICAEW Tax Faculty published its response to the proposals on 15 August - endorsed by the CIOT - and recommended that when an investigation fails to uncover evidence of serious tax fraud, the professional costs of dealing with the investigation should be admissible as a deduction for tax purposes. As things stand, the Code of Practice states that these expenses are not tax deductible.

Another concern raised by the Tax Faculty was that tax fraud investigations by the new Serious Civil Investigation office (SCI) need to be 'clearly distinguishable from, and much more formidable than' anything being conducted by a local office.

This concern arises because HMRC restructuring is blurring the distinction between the SCI and regional compliance sections, according to Will Heard, head of tax investigations at Shaw & Co and a former senior inspector in the Special Compliance Office.

'These regional groups will be headed up by ex-SCO inspectors and their Customs equivalents,' said Heard. 'They are already taking on cases that would previously have been obvious SCO cases. Consequently the impact of an SCI type of investigation will be diminished unless SCI can distinguish itself from regional groupings, otherwise taxpayers under investigation will not be sufficiently pressurised to come clean in the major complex fraud cases and neither will their advisers take matters as seriously.'

This lack of certainty is the main potential pitfall of the new procedure, said Heard: 'It is incumbent on HMRC to make detailed information available to the public as to what type of cases will be dealt with by SCI and what type by the regional compliance offices.'

Even without the confusion over which office will handle cases, taxpayers may mistakenly believe that the new civil procedure can be taken less seriously than the old Hansard approach.

'The ill informed or misguided taxpayer may think that the process imposes a less onerous procedure or one with less threat in it,' Heard said .

This point was also raised by the Tax Faculty, which commented: 'The taxpayer needs to know from the Code of Practice that non-cooperation is not a soft option.'

The Tax Faculty also recommended that HMRC should disclose the reasons for their concerns at an early stage in the investigation. 'We strongly believe that could have an enormously beneficial effect on making the procedure more effective and reducing the length of the investigation,' the Faculty stated.

'Indeed, there are a number of legal arguments which support the need for early disclosure on human rights grounds.'

Conversely, Heard says there is a danger that HMRC will settle for 'cheap and cheerful disclosures' after the new civil procedure is introduced, especially as HMRC doesn't have the resources to investigate all the cases arising from improved intelligence (such as NCIS reports and the offshore project).

Heard added that the letters sent out recently to offshore bank account holders suggesting that they might like to make disclosures before HMRC started its own investigation were an example of this new approach.

'This may well flush out some good quality disclosures, but by HMRC disclosing the source and nature of its investigation at the outset, many taxpayers will be tempted to give limited disclosures,' he said.

'HMRC will be tempted to accept them without much question so as to show immediate results to their political masters.'.

Related articles

  • Its not 'Hansard' anymore; new HMRC civil fraud procedures 17 Aug 2005
  • Offshore account holders to receive 'intimidating' letters - 25 Jul 2005
  • Hansard ruling hits thousands of tax investigations 8 Sept 2003
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