October 2024 Tax Investigation Round Up

October's round up of the latest tax investigation news and cases:

• HMRC criminal tax investigations yield nearly £1 Billion
• HMRC issues record £153m in VAT penalties
• 72-year-old jailed for £118k scam

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HMRC criminal tax investigations yield nearly £1 Billion

HMRC’s most serious criminal tax fraud investigations brought in £991 million in the year leading up to April 5, 2024, marking a significant rise from £89 million the previous year, according to research by multinational law firm Pinsent Masons.

Ian Robotham, Legal Director at Pinsent Masons, highlighted that these investigations, known as Code of Practice 9 (COP9) probes, serve as a "last chance saloon" for individuals who have committed tax fraud. COP9 allows taxpayers to come forward, admit their fraud, and pay outstanding tax, penalties, and interest, in exchange for avoiding criminal investigation and potential prison time.

However, Robotham also noted that HMRC may still initiate a criminal investigation if taxpayers provide false or misleading information during the interviews or broader investigation process.

“HMRC’s income from serious criminal investigations has increased sharply in the past 12 months,” said Robotham. “The new Government has set itself ambitious targets for taking in extra revenue from tackling tax avoidance and evasion so we should expect more of these investigations in the future.”

He added, “Taxpayers must take COP9 investigations very seriously. Complying with these HMRC investigations can significantly reduce the punishment – but the taxpayer must give an accurate, open, and honest disclosure of the tax they haven’t paid.”

The most significant single yield from a COP9 investigation in the last year was the case against Bernie Ecclestone, which resulted in a £653 million recovery. Even excluding this case, HMRC’s income from COP9 investigations totaled £338 million in 2023/24, representing a nearly 400% increase from the previous year.

Yields from HMRC’s non-criminal investigations under Code of Practice 8 (COP8) also saw a rise, reaching £83.2 million in 2023/24, up from £72.4 million the previous year—a 15% increase. COP8 investigations typically focus on those suspected of artificially reducing their tax bills through tax avoidance schemes. Cooperation with these investigations allows taxpayers to avoid the most severe civil penalties.

In both COP8 and COP9 cases, the severity of penalties imposed by HMRC depends on whether the taxpayer took reasonable care. If a taxpayer is found to have deliberately concealed information, the penalties are significantly higher. Penalties as a proportion of the COP9 yield increased from 17% to 36% in the last year, with the Ecclestone case contributing to the rise. Even without that case, penalties have increased over the past year. Ecclestone faced a 200% penalty due to offshore tax failings.

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HMRC issues record £153m in VAT penalties

VAT-related penalties reached a total of £153 million in the past year, as HMRC increased its focus on cracking down on deliberate errors in VAT returns, according to a report by Lubbock Fine. The penalties represent a 38% increase in fines for serious cases, where HMRC believes businesses intentionally underpaid VAT.

Deliberate VAT errors occur when HMRC determines that a business made an active decision to underpay VAT, either by not declaring the correct VAT on sales or overclaiming VAT on costs. These errors can lead to penalties ranging from 20% to 100% of the VAT owed.

In 2023-24, the number of serious fines issued by HMRC rose to 2,781 from 2,011 the previous year, with a total of 46,376 penalties handed out. This reflects HMRC's increased efforts to address deliberate VAT return errors.

Jas Dhillon, VAT partner at Lubbock Fine, remarked, "HMRC is getting tougher with its VAT fines and issuing a growing number of its most serious penalties. It’s difficult not to conclude that it’s a concerted effort to bring in more cash. HMRC appears to be taking a tougher approach to VAT penalties, aiming to categorise more inaccuracies as ‘deliberate.’ Classifying errors as ‘innocent’ would result in lower penalties, or even no penalty at all – which of course means a smaller take for the taxman."

For the most serious cases, where HMRC deems the errors as ‘deliberate and concealed,’ penalties can range from 30% to 100% of the tax due. These cases often involve false or amended documents and intentional tax avoidance. The number of such penalties increased by 4% over the past year, from 1,924 to 1,994.

Graham Caddock, tax investigations director at Lubbock Fine, pointed out that the complexity of VAT regulations can lead businesses to make genuine, unintentional mistakes, such as errors on invoice names or dates, or submitting invoices not subject to VAT. He emphasized that although these mistakes are often innocent, the penalties can be harsh without the proper advice and approach.

Caddock added, "The sharp rise in higher penalties indicates that HMRC is hardening its attitude toward VAT compliance. Businesses should make sure they seek professional advice to avoid VAT errors or mistakes – and to fight their corner if HMRC tries to unfairly levy a harsher penalty than is due."

To avoid or minimize penalties, businesses are encouraged to make unprompted disclosures to HMRC and fully cooperate with tax inquiries. Dhillon explained that an experienced tax advisor can often influence how HMRC classifies errors—whether as careless or deliberate—which can have a significant impact on the penalty imposed.

"In a lot of cases, we have challenged HMRC’s categorisation of the behaviour that caused the inaccuracy, which can often result in no penalty being charged," Dhillon said. "For example, we have managed to persuade HMRC that an inaccuracy, such as incorrect claims relating to invoice/tax point dates, was merely an innocent error made despite the taxpayer taking reasonable care (and thus not done deliberately)."

It is also important to note that HMRC does occasionally make mistakes. Recent rulings in First Tier Tribunals have favoured taxpayers due to instances of poor advice from HMRC advisors, underscoring the importance of seeking professional advice in navigating VAT regulations and disputes.

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72-year-old jailed for £118k scam

A re-offending con artist has been jailed for the second time after defrauding her grieving neighbor out of £118,000 following an investigation carried out by HMRC.

Margarita Clark, 72, was sentenced to 43 months in prison after pleading guilty to fraud by false representation. Her latest victim, a woman also in her 70s, had moved in next to Clark following the death of her husband in 2018. Over time, the two became close, often meeting for coffee and lunch, during which Clark discussed finances and falsely claimed to own property in Spain.

Clark convinced her neighbor to invest in the fictitious property, promising her a return through interest. Over the course of two years, Clark fabricated stories about various properties, persuading her neighbor to hand over more of her savings.

In total, Clark defrauded her neighbor out of £118,000, spending the money on luxury items including a new car, expensive clothes, and even convincing the victim to fund a trip to Dubai.

The scam was exposed in 2020 when a family member of the victim grew suspicious and searched Clark’s name online. They discovered that Clark had previously served 40 months in prison in 2014 for scamming her friends out of £2.5 million. Police were contacted shortly after.

Detective Constable Emma Cozens, who led the investigation, described Clark as a "cold and calculating individual" who took advantage of her neighbor’s grief. “The victim genuinely believed she had made a close friend and was left shocked and heartbroken when the truth was discovered. I’m pleased that Clark is now behind bars.”

Clark was sentenced at St Albans Crown Court, marking her second imprisonment for fraud.

Cozens added, “Discovering you’ve been a victim of fraud can have a devastating impact. Many people are too worried or embarrassed to report what has happened to them. If you think you may have been approached in similar circumstances, please do contact police. We take all reports seriously and have specialist teams on hand to help.”