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HMRC’s Fraud Investigation Service

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There have been recent press reports, based on data received by Bureau of Investigative Journalism, that the number of civil enquiries undertaken by the Fraud Investigation Service (FIS) into offshore, corporate and wealthy has halved in five years.

This may be a concern, but it is important to understand FIS’s role in HMRC’s compliance’s activities. Originally a creation of the former Inland Revenue, FIS is an elite specialist unit tasked with undertaking civil and criminal enquiries. The civil enquiries were conducted under Code of Practice 9 (COP 9) where serious fraud was suspected and Code of Practice 8 where COP 9 was not considered appropriate.

Even though additional resources have been added to deal with indirect tax and excise duty enquiries, FIS is still a small unit and therefore does not have the capacity to undertake large volume enquiries. In the past, the FIS COP 8 and 9 teams usually consisted of investigators who were experienced and capable, and therefore could undertake complex enquiries. These investigators were more focused with quality over quantity on the basis that it was more cost-effective to settle one large enquiry than two small ones. We should also not forget that the costs to the taxpayer of each enquiry could be substantial.

Having manageable numbers of cases allowed investigators to be more innovative (whilst remaining within the legal framework) when addressing suspected tax fraud or dealing with bespoke tax avoidance. For example, in pre-statutory residence cases, FIS identified the contradiction between a person who claimed not to be UK resident with holding a UK firearms licence (which required the person to be UK resident).

In the past, tax advisers would understand the seriousness of a FIS enquiry and explain this to clients. However, in recent years, this has been diluted by some of the low level enquiries, in particular COP 9 enquiries.

Part of this problem stems from the fact that senior management made the conscious decision to allow anyone who committed fraud (deliberate behaviour) to voluntarily make a COP 9 disclosure, regardless of the amounts involved. This was because it was perceived that it was unfair that a person who committed a large fraud would be given immunity from criminal prosecution under COP 9. In theory, a person could request COP 9 for tax fraud of £5,000, which is not cost-effective for all parties concerned. This approach suggests that HMRC has failed to appreciate the original reason for the creation of a specialist unit, and that FIS should be focusing its limited resources on the more complex type of enquiries, such as the one into the tax affairs of Mr Bernie Ecclestone.

As mentioned, previously the most experienced HMRC investigators were likely to end up at FIS. But over the years, trainees have been dropped into FIS who do not have any investigative experience. This can be resolved if there are sufficient experienced officers who could help to develop the trainees, but in the last five years there has been an exodus of experienced investigators leaving FIS.

The exodus of experienced investigators has in part occurred as they have struggled to get promoted to management leadership roles due to the absurdity of a belief that ‘managers do not need to know what their staff are doing to manage them’. Unfortunately, it does matters to tax advisers, as the lack of experience has an adverse impact when they are looking to resolve matters for their clients.

There was an added benefit to the wider HMRC compliance activities, as the experienced investigators would do a tour of duty in FIS before rejoining other parts of HMRC, which allowed them to impart knowledge and experience into the next generation of investigators.

There is anecdotal evidence which suggests that some enquiries are not being referred to FIS at the right time or at all, for example complex tax evasion teams who undertake wide ranging cross tax enquiries on the basis they suspect fraud. You do wonder, if fraud is suspected, why has it not been referred to FIS for it to conduct the enquiry.

Whether the new FIS senior leadership team manages to resolve some of these major issues remains to be seen. Refreshing the COP 9 process was a step in the right direction, although it perhaps should have included a de-minimis limit. 

Issue: 1656
Categories: In brief