HMRC needs more resource to tackle tax fraud, says expert

She was commenting as the Public Accounts Committee (PAC) released a report concluding that HMRC is "not doing enough to tackle tax fraud". The report said that it had made "only limited progress" in reducing the level of losses from tax fraud, which has been "relatively constant" over the last five years, at around 3% of all tax liabilities.

"HMRC is probably more effective than it has ever been. It has resources such as its Connect computer system which helps it to join the dots between numerous different sources of information to enable it to track down tax evaders.  However, it is fighting evasion on so many different fronts that it simply needs more resource to be really effective" Fernie said.

The PAC said that it could not judge how effective HMRC is at reducing the tax gap "because the way it reports its performance is too confusing". It called on HMRC to clearly set out in its annual reports the relationship between its compliance yields and changes in the tax gap and to publish this information.

Tax fraud results in losses of around £16 billion a year, almost half of the £34 billion tax gap. The tax gap is the difference between the amount of tax HMRC collects and how much it should, in theory, collect.

Tax fraud includes tax evasion, when registered individuals or businesses deliberately omit, conceal or misrepresent information to reduce their tax liabilities and the hidden economy where a person's entire income or one source of income is unknown to HMRC. It also covers coordinated and systematic actions by criminal gangs, which usually relate to VAT fraud or alcohol duty fraud.

The report also said that HMRC needed to increase the number of investigations and prosecutions of wealthy tax evaders. It said that failure to prosecute more than one individual from a list of individuals with Swiss bank accounts provided to the UK by the French government (the so called Falciani list), "creates the impression that the rich can get away with tax fraud". It called upon HMRC to publicise its investigation and prosecution work "to deter others from evading tax and to send out a message that those who try will not get away with it".

In November 2015 the PAC said that HMRC's record for prosecuting cases of offshore tax evasion was "woefully inadequate".

"The lack of prosecutions in the past reflects, to a large extent, Government policy in encouraging individuals to come forward under the Liechtenstein Disclosure Facility (LDF) and other initiatives.  With the closing of the LDF, and the new strict liability offence for offshore tax evaders, we expect it to become much easier for HMRC to bring prosecutions in the future" Fiona Fernie said.

The government is proposing to introduce a new offence if a UK taxpayer fails to notify HMRC that they are chargeable to income tax or capital gains tax in respect of offshore income, assets or activities or fails to file a return or include such income or gains on a tax return. Under the current law a taxpayer can only be guilty of a criminal offence if HMRC can prove that the failure was deliberate. Under the new 'strict liability' offence the failure to declare the income or gains is sufficient and there is no need to prove that it was deliberate. The maximum penalty for the offence would be a prison sentence of up to six months. It is expected that the new offence will come into force in 2017.

The government announced this week that is bringing forward the introduction of a new criminal offence for companies and partnerships which fail to prevent the facilitation of tax evasion by their employees. It was initially due to apply from 2017 but the prime minister announced that it would now have effect this year.

"Prosecuting companies has also been extremely difficult in the past, and again the new offence of failure to prevent the facilitation of evasion will see a rapid improvement in company procedures to prevent fraud by employees" said Fiona Fernie.

Earlier this month millions of documents reportedly detailing the use of offshore tax structures in Panama were obtained by the media.

"The release of the 'Panama Papers' underlines that there are wealthy people and companies who seek to keep their affairs secret.  Where this secrecy involves criminal activity, prosecution must follow—and the threat of prosecution must serve as an effective deterrent to others" said chair of the PAC, Meg Hillier.

Fiona Fernie said that any information in the leaked documents which suggests UK-based individuals are involved in tax evasion through Panamanian structures "is likely to lead to a burst of investigative activity by HMRC".