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25 Jan 2013

Corker Binning partner comments on latest crackdown on tax evasion

In a piece in Legal Week Andrew Smith, partner, Corker Binning, looks at the implications of the latest crackdown on tax evasion.

The real rogues gallery – will corporate offenders avoid the spotlight in the ‘middle-class’ tax crackdown?

With just days to go before taxpayers across the land are due to file their online tax returns, the Director of Public Prosecutions, Keir Starmer, this week announced his desire to “ramp up” the number of prosecutions for alleged tax evasion.

In 2010 there were just 200 convictions for tax evasion despite an estimated cost of such fraud of £14bn per year. This figure increased to 550 convictions in 2011. Mr Starmer’s aim is to bring at least 1,500 prosecutions for tax evasion in the year 2015. This prosecutorial effort will be backed by an additional £1bn to be allocated to HM Revenue & Customs (HMRC).

According to Mr Starmer, this expenditure is justified because “in a recession, when ordinary law-abiding taxpayers are suffering real hardship, the need to deter, detect and prosecute those who evade tax is greater than ever.”

It would be wrong to characterise Mr Starmer’s announcement as a new initiative. It is, rather, further evidence of a continuing shift in both the aims and methods of HMRC in criminal cases.

In recent years HMRC has encouraged individuals to disclose historic tax liabilities under bespoke schemes which offered a guarantee of non-prosecution. For many would-be entrants into those schemes, the deciding issue was whether there was a credible risk of their liabilities being independently discovered – and a prosecution ensuing – if they remained undisclosed. Mr Starmer’s desire to accelerate the CPS’s recent crackdown suggests that many tax evaders can no longer afford to be so complacent about the dangers of hiding their

The announcement also marks another shift in prosecutorial emphasis. In recent years much of HMRC’s investigative resource was absorbed in targeting what might be called “extractive tax fraud”, whereby criminal gangs systematically sought to extract huge amounts of VAT or other indirect taxes using fraudulent reclaims based on fictitious trading.

Now HMRC’s priorities are being rebalanced towards investigating individuals who have dishonestly set out to avoid paying the tax they owe, typically direct taxes such as income tax or capital gains tax. In this sense, it is an effort to target ordinary middle class tax evaders, who might, for example, have deliberately failed to declare the rental income on a second property, rather than the career criminals.

Mr Starmer is keen to point to what he sees as the social purpose of his policy, linking the punishment of tax evaders with the need to gratify the law-abiding majority who are struggling in this age of austerity. This connection mirrors HMRC’s recent decision to publish for the first time a gallery of ‘2012’s biggest tax cheats’ on the photo-sharing website Flickr.

It is however uncertain whether Mr Starmer will succeed in this aim. It may be socially progressive to prosecute tax evaders from all walks of life, but public anger is arguably directed principally at the labyrinthine (and in many cases entirely lawful) tax avoidance tactics of large multinationals. Convicting individuals for tax evasion will create the appearance of enforcement activity – and perhaps another Flickr gallery – but it will be difficult to characterise this success as the redistribution of wealth from rich to poor, particularly given that some of the evaders will themselves be earning little.

To have a fair and effective policy on tax evasion, HMRC will need to use at least part of its enlarged budget to investigate egregious examples of significant tax evasion where the public interest is genuinely engaged – and to avoid any public perception that individuals are being targeted at the expense of sophisticated corporates. Ultimately the acid test will be whether the tax take increases as a result of the deterrent effect of prosecution.

Author: Andrew Smith, partner at Corker Binning.