Public concern over tax evasion does not reflect reality, expert says

Pinsent Masons tax expert Phil Berwick said that the number of "serious" tax evasion cases identified by HM Revenue and Customs (HMRC) fell by almost a quarter over tax year 2011-12. This is the lowest number of such cases identified by the department in the last five years, he said.
He added that it was unlikely that the fall – down 23% from the 4,506 cases identified in 2010-11 to 3,456 cases last year - was due to HMRC becoming less active or less effective in its pursuit of tax evasion. Previous research by the firm, published last month, more than doubled the number of property searches it carried out as part of criminal investigations into tax evasion over the same time period.

"Public concern over tax evasion and tax avoidance has reached fever pitch, but these figures show the level of outcry and language used by some is not entirely justified," Berwick said. "A significant fall in the number of cases identified by HMRC's local offices doesn't really gel with the idea that there is a substantial and growing threat to public spending because of tax evasion."
HMRC defines a tax evasion case as "serious" where prosecution is possible, or if the amount of tax involved is more than £50,000. These cases are referred by local offices to HMRC's central 'Evasion Referral Team'.

Press reports concerning tax evasion and avoidance do, however, make it easier for HMRC to gain more powers to undertake investigations or challenge the way that businesses arrange their tax affairs, according to Berwick. The general anti-abuse rule (GAAR), which the Government proposes to introduce from next year, will hand "substantial new powers to the taxman to act as judge and jury on legitimate tax planning" by businesses, he said.

Last week HMRC announced that it would target London legal professionals and certain grocers, restaurant owners, hairdressers and scrap metal dealers in its latest round of targeted tax investigations.

"HMRC would find it far harder to build up such an arsenal of tools if it weren't for the backdrop of stories about avoidance and evasion," Berwick said. "Some of the powers HMRC has already are very tough, such as entering business premises without warning and arresting suspects without the presence of police officers."

In addition, the department is becoming "more draconian" in the way it punishes offenders it successfully identifies, according to Berwick. He cited a case in which HMRC pursued criminal action against a Surrey plumber, Melvyn Careswell, who evaded £50,000 of income tax as one which the department would previously have pursued using civil, rather than criminal, measures.
"The Melvyn Careswell case is a perfect example of HMRC's current attitude to the prosecution of tax evasion cases," he said. "A few years ago, a £50,000 tax evasion case would almost certainly have been subject to civil, rather than criminal, prosecution. HMRC is now prepared to use its strongest anti-evasion measures in cases that would previously have been regarded as quite modest in size."

The GAAR is one of a variety of measures recently announced by the Government to crack down on tax avoidance. The proposed rule will apply to the main direct taxes and national insurance. HMRC is also consulting on changes to the Disclosure of Tax Avoidance Schemes (DOTAS) rules that would make it easier for the department to find out about taxpayers using avoidance schemes to artificially reduce their tax liability.

Chief Secretary to the Treasury Danny Alexander announced further Government investment to tackle tax avoidance today. HMRC's Affluent Unit, set up in October last year to identify areas in which wealthy individuals are avoiding or evading tax will be expanded to deal with taxpayers with a net worth of £1 million as opposed to the current £2.5m threshold.

Alexander said that this new threshold would bring a further 200,000 of the wealthiest individuals within the Unit's remit. HMRC will also double the size of the team working on the Liechtenstein Disclosure Facility (LDF), which is an arrangement between the governments of Liechtenstein and the UK which enables UK residents to declare previously undisclosed liabilities. The scheme is now expected to bring in £3 billion in unpaid tax, over £2bn more than anticipated when the agreement was signed in 2009.