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HMRC raids and criminal investigations

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While criminal investigations are still likely to remain the exception rather than the rule for cases of suspected tax fraud, we have all been served notice that their frequency is likely to increase – every company now should have a ‘raids defence’ strategy as a routine operational part of their risk management procedure. It is important to remember that innocent third parties can be raided as well as the suspect. It is also important to remember that a search operation and arrest does not necessarily lead to charge, let alone conviction.

In September 2010 the Chief Secretary to the Treasury, Rt Hon Danny Alexander MP, announced at the Liberal Democrat Conference that there would be a five-fold increase in prosecutions for tax fraud over the course of this Parliament. The Comprehensive Spending Review in October 2010 set out further details of this – namely that £900 million of savings made by HMRC pursuant to their obligation under the CSR would be ‘ring-fenced’ and would be allocated to tackling evasion and avoidance. The purpose of this article is to give a practical overview of criminal investigations and search operations in particular.

Why now?

The so-called ‘dash for cash’ by HMRC has focused attention on collecting the maximum amounts from non-compliant taxpayers, notably those whose behaviours amount to avoidance or evasion. In terms of the latter, the various ‘amnesties’, commencing with the Offshore Disclosure Facility in 2007, have provided an opportunity for non-compliant taxpayers to come forward and ‘pay up’ in return for a more lenient tax bill.

These various amnesties are generally acknowledged, so far, as having achieved moderate success only. In any event, they are largely targeted at undisclosed funds held in offshore bank accounts (only one potential form of evasion) – or alternatively aimed at particular sectors where there is a perception that abuse is rife.

Opportunities to ‘come forward’ are usually only embraced if reinforced by a fairly menacing alternative – referred to typically as ‘carrot and stick’. An element of ‘stick’ is provided by the penalty regime introduced in FA 2007, which significantly restricted HMRC's ability to reduce penalties in more serious cases.

The maximum penalty was subsequently raised to 200% for certain cases of conduct by FA 2010 Sch 10.

Historic prosecution policy

Historically, HMRC only prosecuted a very small minority of cases where fraud was suspected – 0.5% is often the figure quoted. In the 2009/10 tax year there were 157 convictions for tax evasion other than MTIC. If one assumes that there will be a five-fold increase in prosecutions (and that not all investigations result in successful prosecution) it must be the case that 1,000 or more tax-driven criminal investigations will be the target in future years.

Future prosecution policy

HMRC's criteria for prosecution are set out in the Criminal Investigations Policy Document that is periodically updated. There are (for practical purposes) two categories where criminal investigations are actively contemplated, the first comprising scenarios where the default position is prosecution (MTIC fraud, VAT Bogus registration and organised Tax Credit Fraud) and a number of other categories where prosecution will always be considered (known as the ‘heinous’ categories). The document contains a comprehensive preamble which states that HMRC reserve the right to prosecute in every case and the document is not therefore in any way ‘binding’ in terms of preventing HMRC from prosecuting in particular circumstances. However, as a matter of practice (see above) prosecution has been very much the exception rather than the rule and in most ‘heinous’ cases it is possible to secure a Civil Settlement under Code of Practice 9, which has generally been the alternative to a criminal investigation.

In future, given additional resource, the expectation is that HMRC will stand by their existing criminal investigation policy, but will increase the number of investigations in the ‘heinous’ category. There are a number of areas that seem already to be a focus of attention. The first is professional advisers – particularly those who HMRC perceive to be operating a systematic ‘attack’ on the tax system, whether by selling tax schemes or by operating accounting practices of which HMRC disapprove (HMRC will be particularly vigilant for any evidence of fraud perpetrated by such people).

Another area of focus has been tax planning arrangements (or, as HMRC would regard them, tax avoidance schemes) where HMRC assert that disclosures have been incomplete, misleading or ambiguous, or where inaccurate or misleading information has been given in response to HMRC enquiries.

In both cases the prediction is that a policy of criminal investigation will intensify.

A second area which technically constitutes ‘heinous’ conduct, but where HMRC have tended not to opt for criminal investigation, has been in respect of taxpayers who have been subject to Code 9 in the past. One of the essential objectives of a civil settlement is that it should operate as a ‘last chance saloon’, with the effect that once a taxpayer has been through the process he knows that the next time he will certainly face prosecution. Taxpayers who are subject to the Code 9 are often individuals who have made their money through entrepreneurial activities – and hence are not afraid to take risks. Having been caught once and reached a financial settlement with HMRC under Code 9 (which, though painful, does not usually cause their business activities to fold) there may be a dangerous temptation to revert to former practices unless there is a clear deterrent.

HMRC have taken steps to address this partly through a tougher penalty regime (see above). But there is no deterrent like the threat of imprisonment – and it is often forgotten that the extensive powers of confiscation and seizure of the proceeds of crime (under the Proceeds of Crime Act 2002) can have the effect of wiping out a lifetime's work, let alone the cost and aggravation of criminal investigation, charge and trial that can potentially last several years.

Another area which HMRC can be expected to target is the operation of offshore accounts and income-producing assets which have not been declared for tax purposes. This whole area has been the subject of the series of ‘quasi-amnesties’ over the past four years, most recently with the Liechtenstein Disclosure Facility (which is technically operational until March 2015).

The big question will be ‘how will HMRC treat taxpayers who have not come forward under the amnesty arrangements?’ As with the Code of Practice 9, amnesty arrangements only work if they are backed up with ‘teeth’. Two taxpayers holding offshore accounts in Switzerland were recently arrested instead of being offered Code 9, which suggests that HMRC's strategy is already changing.

The course of criminal investigations

It is worth having a look at the course of a criminal investigation and some of the practical points involved.

The ‘Dawn Raid’ or ‘Search under warrant’ is usually the first that is known by a suspect about a criminal investigation. It usually starts first thing in the morning and involves searches of a taxpayer's business and domestic premises. It will usually involve a number of arrests (of the main perpetrators of the alleged fraud and/or of their advisers) and those arrested will be taken to a police station and questioned on tape and under caution (by HMRC investigating officers) following the procedure under the Police and Criminal Evidence Act 1984. The interviews will usually be conducted simultaneously with the search. Such an operation utilises immense resource (and hence cost) from HMRC's perspective. One hundred officers or more can be involved in such an operation and in order for it to proceed it will be required to be signed off at the very highest level within HMRC. Significant prima facie evidence of fraudulent activity is therefore required before an operation can be mounted – as well as the relevant prosecution criteria being satisfied so that it is clear that the resource in question is being committed ‘in the public interest’.

In order for a search operation to proceed it must be conducted under warrant, which itself must be authorised by a Justice of the Peace. Where ‘Special Procedure Material’ is likely to be found on the premises where the search is to be conducted, the warrant will need to be authorised by a Circuit Judge. Special Procedure Material includes documentation held under a duty of confidence to a third party, so a bank, insurance company or a solicitor's or accountant's office will be likely to contain such material.

The terms and scope of the warrant are both extremely important from the point of view of the permitted extent of the search. The warrant will specify the properties that the officers are empowered to search, the nature of information sought, the number of officers expected to conduct the search and the period during which the search may be conducted. This may be narrow in scope, but equally it may be extremely wide. Warrants may now be issued which apply to ‘any premises occupied or controlled by’ a particular taxpayer. Broadly, if the subject of the search is himself a key suspect in the investigation the scope of the warrant is likely to be very broad. If (as may well be the case) the premises being searched are not those of the suspect himself, but the purpose of the search is to uplift evidence in relation to a third party suspect, the nature of the search is likely to be much more targeted.

Do’s and don’ts

There are a number of key ‘do's and don'ts’ in such a scenario:

  • Do ensure that you obtain legal advice urgently from a solicitor experienced in dealing with these situations. Ask the HMRC officers if they will delay commencing their search before legal assistance arrives. In any event, ensure that a lawyer speaks to the lead HMRC officer at the earliest opportunity.
  • Check the warrant very carefully to ensure that you are aware of its scope (both as to premises and material) and clarify this with the HMRC officer leading the operation. Remember that the scope (as to material or premises) may be very wide. If it strikes you as unnecessarily wide, discuss this with your solicitor urgently.
  • Do not impede the search. Once you have verified the warrant remember that HMRC have a right to execute it and that obstructing them is a criminal offence it its own right.
  • Give the officers all reasonable assistance in carrying out the practicalities of the search within the terms of the warrant. If relevant information is stored on computers you are obliged to supply them with passwords, etc. Equally, if you do not unlock doors, safes or cabinets, HMRC will be entitled to use force to open them.
  • Do not answer questions or discuss any matter other than those relating to practicalities of the search itself. HMRC have no right to use a search warrant for the purpose of asking questions in relation to the underlying investigation. Ideally, make sure that all staff are aware of this.
  • Monitor what the officers are doing and what they are searching. As long as you do not obstruct or impede them you are perfectly within your rights to ‘shadow’ them and you should make a note of what they are removing (if you can), logging the serial numbers of the bags in which documents are being placed.
  • Make sure you identify documentation subject to Legal Professional Privilege (LPP). HMRC are not permitted to remove such documents. On a major operation the HMRC team may well include an ‘independent’ barrister whose purpose is to stop wholly unmeritorious claims for LPP. However, if there is a genuine dispute in relation to this the material in question should be bagged separately and adjudicated upon at a later date by a Judge.
  • HMRC are entitled to image ‘electronic’ information and, if necessary, to remove IT hardware. They may bring as part of the team a computer imaging specialist who will be able to download material on site whilst the search operation is under way. This should prevent the need for the removal of computer equipment, which is immensely disruptive to the business. However, it is again important to check the scope of what is on the warrant.
  • HMRC are obliged to provide copies of all documentation with a reasonable period of time after conclusion of the search. HMRC will need to retain the originals of all such documents seized, since potentially it will need to produce the originals for evidential purposes in any trial. It will be necessary to have very serious regard to this obligation as copies of certain documents are likely to be necessary for the ongoing conduct of business.
  • You will need to establish a communication strategy for staff, clients, customers and the media (trade, local and potentially national press depending on the profile and size of business). This is absolutely crucial, in particular because as part of their ongoing investigation HMRC are likely to contact staff and customers and suppliers in particular in order to obtain further evidence.

Just the start...

Unfortunately for taxpayers being searched as suspects in a criminal investigation that is just the start of the matter, although this is less likely to be the case where the search is of a ‘third party’ nature (see above).

James Bullock, Partner, McGrigors LLP