A recent HMRC press release trumpeted the £218m recovered by its Fraud Investigation Service (FIS) in 2020-2021, taking its total for the five years since it was set up to just over £1bn. Harry Travers and John Binns, partners in the Financial Crime team at BCL Solicitors ask if we really should be celebrating?
It may seem churlish for any taxpayer to query or complain about the sums recovered from tax fraud: arguably, any amount is good news, and £1bn is surely a big number in anyone’s estimation.
Like any statistic, though, the reader must look beyond the headline and ask what factors have contributed to it. Where the headline is about sums recovered from crime, those factors are threefold: the amount of crime; the methods available to recover them; and the amount of effort and resource put into those methods of recovery.
When we look at it in those terms, sadly £1bn is not such a big number after all. And though the number of methods and the amount of resource are certainly on the increase, there are reasons to be sceptical that this is a wholly good thing.
How much tax fraud is out there?
We do not, for obvious reasons, have reliable figures for the value of tax fraud committed. HMRC produces annual estimates of the ‘tax gap’ – the difference between expected income from tax and the actual receipts – which includes avoidance and non-payment for non-fraudulent reasons, as well as actual evasion. The latest estimate, for 2019-2020, given in September 2021, was £35bn, which campaigners say includes half that figure from fraud.
Assuming this is true – and remembering that the £1bn is a five-year total, and this year’s was £218m – then we might say that FIS is recovering about 1.25% of the tax lost through fraud. For simplicity, that would ignore the fact that the frauds whose proceeds were recovered would necessarily come from previous years rather than this one.
Importantly, we are also not including in that ‘tax gap’ figure the value of frauds committed against the UK government’s Covid-19 support schemes, several of which are administered by HMRC. In case we needed any further help to put that £1bn figure into perspective, HMRC’s own estimate is that around 9% of the £61bn it paid out under the furlough scheme in 2020-2021 was the result of ‘fraud or error’.
How does HMRC recover the proceeds?
It may be premature or unfair to raise Covid support frauds as an issue against HMRC (which, of course, deserves credit for administering those schemes). But it does prompt a question about the nature of the crimes whose proceeds are being recovered: it is not necessarily tax fraud. To explain why, and to look further at how that £1bn figure has been achieved, it is necessary to look at the methods FIS uses to recover these monies.
The starting point, of course, is that tax frauds are criminal offences that can be prosecuted. Where an offender is convicted by a jury, they can be ordered to pay a sum equal to the benefit they have obtained from their crimes, under the confiscation provisions in the Proceeds of Crime Act 2002 (POCA).
Technically, the monies recovered in this way from an order against a tax fraudster need not actually represent the proceeds of tax fraud; they could be ‘clean’ money to the same value. In addition, given the way POCA assumes most convicted defendants to have led a ‘criminal lifestyle’, some of the benefit ‘recovered’ in this way may (notionally) come from other offences.
As resources have decreased, the attractions of pursuing criminal cases and confiscation have lessened for HMRC, and for law enforcement generally, and alternative routes have been created. Shortly after the FIS was set up, the Criminal Finances Act 2017 (the CFA) added new provisions to POCA, which allow the civil recovery in summary proceedings (in the magistrates’ courts) of funds in bank accounts (and certain other assets) that represent the proceeds of unlawful conduct (either in the UK or overseas), and/or are intended for use in such conduct. These sit alongside similar provisions that do the same for cash.
The CFA also introduced two new corporate offences of ‘failing to prevent’ the facilitation of tax fraud (one for UK fraud, one for overseas), which increase the incentives on companies to report such frauds by their clients or customers.
Cumulatively, the changes introduced by the CFA have significantly increased the capability of HMRC to recover the proceeds of tax fraud, without having to prosecute alleged offenders. Notably, most of the examples given in HMRC’s press release are of civil recovery under POCA rather than confiscation. Account Freezing and Forfeiture Orders (AFFOs) are proving particularly popular.
Finally, HMRC has (and is using, ever more aggressively) powers to recover sums civilly, including by use of its Contractual Disclosure Facility (CDF). This procedure, conducted by HMRC under its Code of Practice 9 (COP9), trades a taxpayer’s disclosure of tax frauds committed by them (which, in most cases, opens the door for HMRC to recover at least some of the unpaid tax, plus interest and penalties) for a guarantee that they will not be prosecuted in respect of the disclosed frauds.
What are the issues with these methods?
On the face of it, the use of these civil routes by HMRC represents a ‘win-win’ for taxpayers and fraudsters alike, reversing some of the Treasury’s losses while preserving fraudsters’ reputations and liberties. While some may query whether these outcomes represent genuine justice, they are certainly cheaper than prosecution, and in pure balance sheet terms, they seem to deliver the goods.
Anyone who has been on the wrong end of POCA or COP9 procedures will testify, however, that these methods also raise real issues of fairness. Under POCA confiscation provisions, the rules for calculating a defendant’s benefit and their ‘available amount’ (complete with reversed burdens of proof and statutory assumptions) are draconian, and civil recovery is not much better, with magistrates’ courts often freezing funds on very flimsy bases.
In COP9 cases, notoriously, taxpayers are told that HMRC ‘believe’ that they have committed tax fraud, without any obligation on HMRC to justify that belief. Some take the view that the COP9 procedure is unlawful for several reasons, including that it breaches the taxpayer’s right under article 6(3) of the European Convention on Human Rights (ECHR) to be informed ‘in detail of the nature and cause of the accusation’ against them. But the fact of the matter is that HMRC is rarely challenged on this point, where the alternative for the taxpayer is criminal investigation.
The common thread that unites the use of summary POCA proceedings, including AFFOs, by HMRC and the COP9 procedure is the ease with which they can effectively shift the burden on to an individual taxpayer or account holder, so that they find themselves having to explain their affairs in detail, often in response to allegations that are so vague as to be non-existent. Where the costs of fighting such allegations seem to outweigh the amounts at stake, there can be a temptation to concede for pragmatic reasons, regardless of the truth. This raises questions not only about the procedures’ compatibility with the ECHR, but also about whether some of the monies recovered really come from crime at all.
Is HMRC using its resources appropriately?
The third contributing factor is the amount of effort and resource put in to recovering these sums. Clearly, we would all want to see FIS deploying specialists to pursue the right cases in the right ways, including under POCA and COP9, to recover monies from fraudsters. To its credit, HMRC has said that its approach is ‘about reaching the right outcome for the UK, rather than chasing arbitrary targets for arrests and prosecutions’. Too often, though, as any good defence lawyer will confirm, we have seen it pursue those it perceives as ‘easy’ or ‘deserving’ targets, but where the merits are not made out.
The headline figure of £1bn recovered tells us nothing, in truth, about whether the creation of FIS and the methods it uses are giving ‘good’ results for taxpayers. To assess that, we would need much more transparency about the cases it pursues, its failures as well as its successes, and consider criteria of fairness and justice, as well as simple monetary value. As well as ECHR compliance, we should consider equality of arms, and the need to ensure respondents are properly informed and equipped to defend themselves.
It should be obvious that a drive to enhance the powers of law enforcement, with the aim of raising the numbers of monies recovered, but without having to spend too much extra on their efforts, entails costs and risks as well as benefits. Not only does it ignore the deterrent effect and the moral imperative of pursuing successful prosecutions, it can lead to innocent parties being prejudiced by procedures that lack the rigour of the criminal process, but can nevertheless be stressful, expensive, and damaging to reputations.
As we see the role of HMRC, and the size of the UK’s fraud problem, expand significantly thanks to Covid-19, the idea that it can or should continue that drive to ‘do more with less’ should not go unchallenged. Before applauding the headline of £1bn recovered, we should query not only the real value of that figure, but whether HMRC’s efforts are targeted at the right people.
Harry Travers and John Binns are partners at BCL Solicitors LLP in London. They regularly act for individuals and corporate clients who are affected by, or the subjects of, allegations of tax fraud or its facilitation, including under the procedures of COP9 and POCA.