HMRC is committed to targeting ‘those who deliberately and dishonestly set out to defraud HMRC by evading tax, stealing public funds or cheating the system in other ways.’ But exactly how do HMRC investigate tax evasion? What triggers an HMRC tax evasion investigation? And what are the potential penalties? Read on to find out.

How do HMRC Investigate Tax Evasion?

HMRC states that: ‘most of our work to tackle tax fraud makes use of our civil powers.’ These civil powers are many and varied. HMRC officers can take a deep dive into your tax returns, bank records and assets. It can look at your social media posts and general lifestyle. It can launch a compliance check and open a formal enquiry. Officers can also ask you to attend an interview in person, or visit your home/business address as part of their investigation.

Perhaps HMRC’s biggest investigative tool is its data gathering powers. HMRC runs a system called Connect, a sophisticated software which is fed by all kinds of information, such as details of bank interest, Land Registry reports and credit card data. Third parties are legally obliged to provide this data to HMRC. This obligation is likely to extend to tech companies in the near future, including the likes of Amazon, Apple and Airbnb.

This means that HMRC knows far more about you than you realise. There are also international agreements between the UK and other countries, all of which share information to crackdown on tax evasion. HMRC can sift through all this data to identify anomalies that need further investigation. Officers can then make use of their other investigative powers, such as conducting interviews, compliance checks and formal enquiries.

What Criminal Powers of Investigation does HMRC have?

HMRC says that their civil powers allow officers to ‘get hold of the information we need to identify and collect unpaid tax’. Sometimes, however, it chooses to rely on its criminal powers of investigation instead. These are even more extensive than their civil powers. For instance, HMRC can conduct interviews under caution, make arrests, search your home/business, seize items for expert analysis, and conduct covert surveillance.

HMRC officers can also apply to court for different types of orders. One example is a production order, which demands that a person or organisation hands over information that is relevant to HMRC’s investigation. Another example is an account freezing order, which is when a suspect’s bank accounts are frozen until the investigation (or subsequent prosecution) has concluded. Cash and other assets may also be seized.

If you are suspected of tax evasion, then you may be invited to participate in the investigation in return for immunity from criminal prosecution. This is done under HMRC’s Code of Practice 9 (COP9). Those suspected of tax evasion are asked to enter into the Contractual Disclosure Facility (CDF). This requires you to disclose all details of any wrongdoing, following which HMRC will determine an appropriate financial penalty.

What Triggers an HMRC Tax Evasion Investigation?

An HMRC tax evasion investigation can be triggered by:

  1. Anomalies identified by the Connect system – as mentioned above, HMRC has a sophisticated system called Connect which cross-references data from various sources. Officers are alerted to any anomalies that may indicate tax evasion.
  2. International information sharing – thanks to a global crackdown on tax evasion, countries around the world are sharing information on bank balances, interest, income and dividends. This may flag undeclared income or hidden assets.
  3. Targeting industries suspected of non-compliance – certain sectors receive greater attention from HMRC officers than others. This includes those that have traditionally taken cash in hand payments, such as trades and restaurants. It also includes those that may easily undervalue their true income, such as buy to let landlords, and small to medium sized businesses.
  4. Whistle-blowers and leaks – HMRC has a hotline for anyone wanting to blow the whistle on tax evasion. These tip-offs often come from former staff or disgruntled ex-partners who are going through an acrimonious relationship break-up. Some informants are even paid. Employees or former employees may also leak data which exposes incidents of tax evasion. A recent example is the leaked Panama Papers.
  5. Social media and lifestyle factors – HMRC officers will look at a suspect’s social media accounts, public appearances and interviews to get a better understanding of their lifestyle. If this lifestyle appears to be at odds with their reported income, then it will trigger and investigation.
  6. Suspicious activity reports (SARs) – professionals such as accountants and solicitors are legally obliged to report a customer or client, if they suspect him/her of tax evasion.

What are the Penalties for Tax Evasion?

If a tax evasion investigation is settled through the Contractual Disclosure Facility, HMRC will demand the repayment of the unpaid tax. It will also impose a penalty. For serious tax evasion, this can be up to 200% of the tax due.

If a tax evasion investigation ends in a criminal prosecution, the court must decide whether the suspect is guilty or not guilty. If convicted, the sentence depends on whether the offence was deemed to be a summary offence or an indictable offence. A summary conviction for tax evasion carries a maximum sentence of six months’ imprisonment and a £5,000 fine. This fine can be greater for the evasion of VAT. A conviction on indictment for tax evasion carries a maximum sentence of seven years’ imprisonment and an unlimited fine.

Is HMRC Investigating you for Tax Evasion?

Is HMRC investigating you for tax evasion? You may have received a letter requesting information or inviting you to participate in the CDF. You may have been invited for an interview or scheduled in for a compliance check. Or, you may even have been subject to a raid of your home or business premises.

Whatever the circumstances, we can help you. Our solicitors specialise in HMRC investigations and can represent you throughout proceedings. We appreciate that this is a worrying time for you, but rest assured that we know exactly what to do.

If you would like to have a free confidential discussion with a member of our team, please either make a Free Request For Call Back or call us directly on 01908 414990 and we will be pleased to help you.