The Case for the use of Civil Penalties by HMRC

Introduction [slide 1]

Good morning/afternoon. I am Mike Eland and I am the Director General of Enforcement and Compliance in HM Revenue & Customs. This is a group of directorates whose staff ensure that HMRC collect the right amount of money from UK taxpayers. We also investigate tax offences against the tax and duty system. I’ve been asked to talk about HMRC’s use of civil penalties in the wider context of a model that incorporates prosecutions. Let me start by giving you an overview to set the context.

HMRC and the types of offences it covers

HMRC employs around 80,000 people and has an extremely wide range of responsibilities. We collect and administer all direct and indirect taxes, including VAT, Corporation Tax, Customs and Excise duties and Income tax. We also pay, administer and enforce Tax Credits and Child Benefit, National Minimum Wage and student loans. We are in the process of transferring some of our border functions to the UKBA. It is fair to say that HMRC touches the lives of everybody in the UK throughout their lives whether it is the payment of child benefit and the Child Trust Fund at birth, PAYE when you start work, Stamp Duty when you buy a house, petrol duty when you drive to work, Air Passenger Duty when you go on holiday, or Inheritance Tax when you die.

There is a wide spread of taxpayer behaviour. Broadly speaking we reckon 60% want to pay the right amount either because they believe it is the right thing to do as a citizen or because they don’t want to take any risks. 30% are prepared to take risks dependent on their assessment of the chances of being caught and the sanction that will follow. 10% are determined not to pay taxes at all. We want to counter this spectrum of behaviour with a similar spectrum of response. Helping the willing to stay compliant. Persuading the chancers and risk takers that it is not worthwhile and tackling the determinately non-compliant.

By and large all of these groups are working within the system engaged in legitimate activity. But there is also another group. We collect over £400 billion a year in tax but that is a net figure. We also make payments and repayments of £80 billion a year. With such large amounts of money sloshing around it is not surprising that we also face attacks on the system from outside by organised criminal groups. And because we have some of the highest sin taxes in the world on alcohol and tobacco and people still like to sin we also have significant illegal tax free markets in these goods.

The sanctions we use, where fraud and evasion are concerned, include criminal investigation and civil penalties for evasion. HMRC will also use other methods such as assessment and debt recovery, liquidators, cross agency investigation, requirements for guarantees and securities, policy and regulatory change and targeted campaigns at identified areas of risk. Neither civil penalties nor criminal sanctions alone are sufficient to tackle criminality. We have to balance resources, risk and potential

impact against the criminality and try to apply the most effective or appropriate counter measures in each case.

For HMRC, criminal investigation has primacy but also finite resource. All potential criminal cases are referred to an assessment process. If the case is not taken on for criminal investigation after this assessment the case will be passed down to our civil investigators for consideration. The civil investigators may follow one of our civil investigation procedures or decide that a different civil route, such as provisional liquidation, is more appropriate. If the appropriate response is less specialised, such as disruption of the fraud and recovery via a tax assessment, then this work will be carried out by appropriate compliance staff rather than a specialist investigator.

Criminal Investigation

In making their assessment of whether to take up a case investigators will assess the evidence available, the likelihood and cost of gathering more and how the case sits within the policy framework set for them. We have about 1900 staff years available and this produced about 900 cases last year where charges were laid by RCPO. Over 1500 people were convicted.

In setting the policy framework we look to prioritise investigation of organised crime and to provide an appropriate level of deterrence in other areas.

With a successful prosecution come other benefits. Besides the deterrent of a criminal record and, potentially, a custodial sentence, asset recovery can be used to remove criminal assets and any action has the weight of the Courts behind it. On top of this there is the associated publicity that successful prosecutions bring thus maximising the deterrent effect. In some cases this can generate excellent press. One such example was a successful Carousel fraud case that generated a full page article in one of Britain’s highest circulation newspapers with this heading [Slide 2].

However what we take on for criminal investigation has to be put into the context of the number of potential cases we see. Around 6,200 cases were identified by our officers doing tax compliance or border work last year as being possibly fraudulent and this does not include cases that come from other sources such as the public and other law enforcement agencies. If only 900 are taken up for prosecution what happens to the other 5000?

We adopt our civil investigation of fraud process [slide 3].

Civil Penalty background and process

Civil penalties for fraud and evasion have been used in tax cases since the 1920’s starting on the direct tax side and then extending to the indirect side by statute in the 80s & 90s. They have recently been revised and harmonised in a single process.

The process HMRC uses for investigating a fraud via civil means is very much aimed at inducement and co-operation. If a case is

taken on for civil investigation we will invite those suspected of the fraud to a meeting. At the meeting we explain to them that they are suspected of fraud but we are not investigating with a view to criminal action. Instead we encourage them to co-operate with us by disclosing what they have done and quantifying any fraud. In return for this cooperation we offer to reduce any civil penalties that may become due. The penalties start at 100% of the tax evaded. The reductions can vary, depending on the relevant piece of legislation, but in some cases reductions of up to 80% of the penalty can be made if there is full co-operation.

One of the main benefits of this approach is that the bulk of the investigation work is done for us, at the fraudster’s expense. They have to draw up a detailed disclosure report.

If there is co-

operation the investigator can be working other cases whilst the other side carry out the investigation. We end up using a minimal amount of resource, get the tax and a penalty and get admissions from the person committing the fraud. They earn large reductions in the penalty in return.

So the evader has to pay:

- The tax or duty evaded - A penalty of up to 100% - Interest - Usually a large fee to their advisor!

Under the procedure we make it clear that HMRC will not seek a prosecution for the matters under investigation. This means that

each case is subjected to a rigorous review prior to being taken on, to ensure that there aren’t any hidden issues that would lead to a criminal investigation.

Such a pledge is necessary because otherwise the investigations would be subject to PACE. Though the civil penalty is a criminal charge for the purposes of Article 6 of the Human Rights Act it is not a criminal process for the purposes of PACE. If we retained the possibility of criminal action then we would have to follow the criminal process and the advantages of the inducement and commensurate resource savings would largely be lost.

If the person does not co-operate then we continue to investigate the case ourselves. If we have sufficient evidence a penalty will still be imposed, but at a much higher level than if there is cooperation. These cases take longer and require more work, but the penalty levels imposed are higher. Where there is no co-operation we do imposed 100% penalties, and in some cases we take alternative action. I will come on to an example of this later.

Overall the civil process is simpler and less resource intensive than following the criminal path. There is a lower standard of proof and the appeal process is streamlined. It is aimed at recovery of proceeds and a financial rather than a custodial sanction but, given the amounts sometimes involved, this can be a powerful sanction.

Civil Penalty statistics

It is useful to look at the results of our civil investigations into tax frauds. In the last 12 months we have finalised over 530 cases, with a total value of over £96 million (including penalties). Much of this is paid upfront as evidence of cooperation. We have over 850 cases on hand, with a total value of over £300 million. The average length of a case, from the point it is taken on to the point it is finalised, is less than 2 years for complex cases and around 6 months for the more simple cases (for example, where only 1 tax is involved and the values are relatively low). These results have been achieved with the use of approximately 220 staff years.

By contrast, in September last year, 3 combined criminal operations saw 21 people jailed for a total of 133 years as a result of a set of linked VAT frauds totalling 138 million pounds. The arrests in these operations were made in 2001 and thousands of hours of painstaking and complex work were needed to bring the cases to conclusion; 7 years to bring a case to conclusion. 7 years in which resource is tied up which could have been used on investigating other cases.

Non-Cooperation

Well this is all very well and good I can see some people saying but it does sound as if cooperation is at a premium. What happens if someone really resists a civil investigation.

You are denied

compulsive powers – can you really get a result? Yes I think we can because there are a wide range of civil powers available. The process I outlined is only one. One of the most

potent alternatives is insolvency.

This has the potential to be

extremely effective in tackling fraud and hitting the finances of those involved.

Where we have good evidence of large scale

evasion and a tax debt we can move to recover that amount. The appointments of provisional liquidators or administration receivers are supported by asset-freezing injunctions which are recognised worldwide. Applications are made through the High Court and the Court increasingly recognises the need for freezing orders to be granted where a significant liability exists or is likely to exist, and that there is a risk of assets emanating from noncompliance will be dissipated. Insolvency Practitioners act as administrators as officers of the High Court. Were an individual to obstruct the court-appointed Insolvency Practitioner, this is contempt of court and does, where appropriate, result in a custodial sentence.

The specialist

Insolvency teams have successfully used these powers to recover assets from criminal organisations. Example cases Let me illustrate the use of these powers in relation to some labour providers (gang masters) who were both fraudulent with their tax affairs and exploiting those who worked for them. HMRC was advised by one labour provider that he would not cooperate with a civil investigation in any way and invited HMRC to “do its worst”.

As a result of a good deal of work by the HMRC officers, the Official Receiver (in his capacity as Interim Receiver of the estate)

took possession of the assets, including taking control of the trading business. The labour provider became exceedingly compliant once he realised the wide ranging powers he was subject to and handed over 27 computers, disclosed details of overseas properties and relinquished from his wrist a Rolex watch (valued around £5,000).

In another case, a gangmaster was exploiting his workforce of more than 1,500 people, mostly of Eastern European origin, by obliging them to pay for squalid accommodation deducted from their wages. After these deductions, the only person making any significant money from the business was him.

He was also

seriously non-compliant with his tax affairs. He had a luxurious lifestyle on the back of the exploitation of his workforce. He had a large house, a fleet of luxury cars, children in private schools and several foreign holidays per year. He resisted all attempts to make him pay tax due.

Following an HMRC decision to use insolvency powers as a means to tackle his non-compliance with tax, he no longer has these assets [slide 4] and he lives in a caravan.

The business has been rescued and through the introduction of venture capitalists via the receiver, the employees have kept their jobs and a new management team is in place. This is a good news story on many levels, in that the employees are much better off and the business can survive, generating future tax yield and national insurance contributions.

Relative Cost

So what are our conclusions from this? Here is a comparison. [Slide 5].

Can I conclude by emphasising one point: There is no doubt that the cost and length of criminal investigation in complex cases has increased in recent years. Processes have increased.

Disclosure obligations have increased.

Attempts to

frame charges more narrowly to simplify cases frequently fail. Abuse of process has been extended as a weapon.

This is a familiar litany and I can imagine some of your thinking. “Here we go again - the investigators lament - they are so prone to see themselves as victims of the criminal justice system.”

Well I don’t regard myself or my investigators as victims of the criminal justice system. I regard myself as a customer of it. A customer with a limited budget facing at least 5 years of public expenditure austerity ahead whichever party wins the general election. A customer with a choice.

Please, please don’t price yourself out of the market. Of course I want proper protection of the accused and I know that requires due process but I also want and need speed and affordability.

Criminal sanctions and approaches and civil approaches can best be used working together in harmony. They are compatible and

can be used to reinforce each other. But the existence of civil powers also gives me a choice.

A combination of civil and criminal approaches allows for the most serious perpetrators to be dealt with by the most severe means whilst allowing HMRC to deploy its resources as effectively as possible in tackling a very wide range of offenders. The existence and use of criminal sanctions helps discourage serious crime whilst the civil sanctions help discourage lower level criminality. Both can remove criminal assets and more cases can be handled by approaching some cases via civil means. It could be argued that if there were only criminal sanctions then the fear of serious punishment would be greater. However a combination of civil and criminal approaches, dependent on the case, allows us to deal with a far larger number of cases than we could otherwise manage. Whether the approach is civil or criminal, those who evade their taxes can be sure that they will not keep the proceeds of their evasion and will be penalised for the evasion. Doing this is an essential part of ensuring that the money is available for the UK’s public services, and ensuring that, whilst providing value for money, is a key function of HM Revenue & Customs.

The Case for Civil Penalties Mike Eland Director General Enforcement & Compliance HM Revenue & Customs

VAT Cat Cat’s s a £6.5 Million Villain FLASHY crook Mehtab Khan poses with his pet tiger as he lives it up on the proceeds of a £6.5million VAT fraud.

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The Civil Process

THEN……………..NOW

(Images are for demonstration purposes only!)

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Civil

Criminal

•Simpler Simpler •Cheaper •Quicker •Concentrates on co-operation and recovery of money •Relatively resource-light

•Most Most serious serio s sanctions •Access to compulsive powers •Ability to obtain evidence without cooperation from the suspect •Probable greater deterrent effect •Publicity

BUT:

BUT:

•Can be seen as a softer option •Resource heavy •Must ensure no crossover with criminal •Lengthy •No publicity (currently)

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Thank a you for o you your time e