HMRC must establish 'what works and why' in tax avoidance crackdown, says NAO

A potential £1.9 billion in unpaid tax over multiple tax years is currently under investigation by HMRC's specialist unit, which oversees the tax affairs of around 6,500 HNWIs, according to the National Audit Office (NAO). This figure primarily relates to tax avoidance and the legal interpretation of complex tax issues, rather than deliberate tax evasion, according to the report.

"The tax affairs of the wealthiest in society are complex, making it harder for HMRC to ensure that they are paying the right amount of tax," said Amyas Morse, head of the NAO.

"HMRC's specialist team gives it a better understanding of the tax affairs and behaviours of these taxpayers. While the yields from HMRC's work in this area have increased, it needs to evaluate what approaches are the most effective and to understand the outcomes it achieves," he said.

Established in 2009, HMRC's high net worth unit was set up in order to oversee the often complex tax affairs of wealthy individuals and give them a single point of contact within the tax authority. It was initially used to gain a better understanding of the behaviour of these taxpayers, but has since become increasingly focused on the riskiest taxpayers, according to the NAO report.

Tax recovered following the work of the high net worth unit increased from £200 million in tax year 2011/12 to £416m in 2015/16, exceeding HMRC's initial target of £250m by 2015/16.

According to the NAO, the unit has opened formal enquiries into the tax affairs of around a third of the HNWIs whose tax affairs it oversees, covering an average of four issues per taxpayer. These enquiries, which can be opened where HMRC does not understand or agree with the position taken by a taxpayer, can take a long time to resolve: around 6,000 of the HNWI issues HMRC is currently investigating have been open for more than 18 months, and around 4,000 for more than three years, according to the report.

HMRC prioritises the recovery of tax where it identifies fraud, and uses civil investigations in the majority of cases, according to the NAO. The decision on whether to pursue a civil or criminal investigation is taken by a specialist team within HMRC and based on the evidence available, according to the report. In the last five years, HMRC has opened and closed 72 cases relating to HNWIs, 70 of which were pursued using its civil powers and two using its criminal powers. Of those, one was taken forward by the Crown Prosecution Service for successful prosecution, according to the report.

Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that it was significant that the NAO had found a further 10 cases currently under criminal investigation by HMRC.

"Although the historical number of concluded criminal investigations is very low, the number of live criminal investigations is significantly higher," he said. "This shows a step up in activity as HMRC tries to meet its target of 100 criminal prosecutions of wealthy and corporate tax evaders by 2020."

"The new corporate criminal offence will be a game changer. HMRC is already on the lookout for 'facilitators' of tax evasion to prosecute. The new offence will make it far easier to prosecute the employers of these facilitators. We expect that the 100 target will ultimately include some major banks, trustees and money managers," he said.

The Criminal Finances Bill, which is currently before parliament, creates a new corporate criminal offence for businesses that fail to put in place reasonable procedures to prevent the facilitation of tax evasion by their employees and representatives. The new offence is expected to come into force some time in 2017 and will apply to non-UK based, as well as UK based, corporations and partnerships which fail to prevent their representatives from criminally facilitating a UK tax loss. It will also catch UK-based corporations which fail to prevent their representatives from criminally facilitating a tax loss overseas.