What is income tax fraud ?

Writing at a time when Harry Redknapp is being reported as being on trial for income tax fraud, and when Dave “Trougher” Hartnett, outgoing Permanent Secretary for Tax at HMRC, continues to promote the HMRC fraud reporting hotline, what is income tax fraud ?

There is a statutory offence, introduced by Finance Act 2000, and found at Taxes Management Act 1970, s106A, which addresses an individual who is knowingly concerned in the fraudulent evasion of income tax.. The offence can be tried summarily, with a maximum custodial sentence of six months and a fine of up to £5,000. Alternatively, it can be tried on indictment, in which case the custodial sentence can be up to seven years and the fine unlimited in amount.  (Similar offences also exist for the evasion of Tax Credits, VAT and Customs Duty.)

This stautory offence could be referred to as one of cheating-lite, given that the dishonesty element of the offence which is to be proven is the same as dishonesty under the common law offence of cheating the public purse.  The statutory offence, when first introduced, was intended to give the prosecuting authorities the facility to seek summary trials for less serious cases, with that hitherto having not been possible because cheating is triable on indictment only in the Crown Court.  The less serious cases that were envisaged would be heard by the magistrates courts were those that could be said to be analagous to benefit fraud but, in the event, the offence has been little used, if at all.

The common law offence of cheating generally was abolished in 1968, but retained when it came to the offence of cheating the public purse.

The public purse means any money at the disposal of the Crown, i.e., the government; including some, but not all, public bodies and local authorities. HM Revenue & Customs is, perhaps, the most obvious emanation of the Crown for this purpose, but it is not the only one. 

The offence of cheating the public purse carries, in principle, a maximum sentence of life imprisonment although, in practice, the court will typically pass a custodial sentence of between one and 10 years. The court can, additionally, impose an unlimited fine which can supplemented with a confiscation order under the Proceeds of Crime Act 2002.

An individual can be prosecuted for cheating even if there is an alternative statutory offence available, Mavji [1987], and cheating does, indeed, remain the prosecution’s offence of choice when it comes to income tax and other taxes.

So, what does cheating the public purse of taxes involve ? The answer is any deliberate conduct by the wrongdoer which results in, or which was intended to result in, tax money being diverted away from HM Revenue & Customs. Diversion covers the non-payment of taxes that are lawfully due and, conversely, the claiming  of tax refunds or credits that are not lawfully due to the claimant.

It should be stressed that cheating requires intent, but not necessarily success. It is the conduct which is criminal, not the result.

The conduct does not have to be a positive act, e.g., the falsification of accounts or a tax return. An omission to act can also suffice, such as the deliberate non-submission of VAT returns and non-payment of VAT in Mavji, or the deliberate failure to notify chargeability to income tax in Steed [2011].  

New and improved COP9, now with added CDF

HMRC has issued a new version of Code of Practice 9, in which HMRC sets out its policy of dealing with tax fraud. The new COP9, which takes effect at the end of this month, can be downloaded here. (The immediately preceding version, issued in July 2011, can be downloaded here. 

The new COP9 incorporates the Contractual Disclosure Facility proposed in a consultation document issued by HMRC in 2011, which can be found here.

In practice, the addition of the CDF should lend absolutely nothing to the working of the very large majority of cases suitable for the COP9 procedure. Or, at least, it will not where recalcitrant taxpayers are properly advised; and, to their credit, HMRC strongly recommend that such taxpayers do seek advice from specialist advisers.

Where, however, and as has increasingly happened since 2005, taxpayers do not seek specialist representation at the very outset, a failure by them to understand properly the CDF will most likely cause significant problems and especially where the denial route is adopted. Here, it remains the case that the vast majority of people including, it has to be said, many of those working in HMRC investigation departments, have no meaningful understanding of what constitutes tax fraud.

We can but hope that this does not lead to further instances such as Steed v R EWCA Crim 75 [2011], in which it remains unknown to all but those involved how the taxpayer ever managed to find himself imprisoned and bankrupted for what appears to be, in the run of things, the most minor of tax transgressions.            

Penalties & surcharges - reminder

The new penalty regime, introduced in 2009, will apply to those individual self-assessment tax returns for 2010-2011 which are due to be filed by 31 January 2011.

Penalties

Failure to submit a tax return for 2010-2011 by the following dates gives rise to penalties, as follows:

31 January 2012:

£100

30 April 2012:

£10 per day thereafter (maximum of £900)

31 July 2012:

£300 or, if greater, 5% of the tax payable for 2010-2011, but remaining unpaid.

31 January 2013:

a)    £300 or, if greater, 5% of the tax payable for 2010-2011, but remaining unpaid – where the failure to submit the return is non-deliberate; or

b)    £1,500 or, if greater, 70% of the tax payable for 2010-2011, but remaining unpaid – where the failure to submit the return is deliberate but not concealed; or

c)    £3,000 or, if greater, 100% of the tax payable for 2010-2011, but remaining unpaid – where the failure to submit the return is deliberate and concealed.  

Surcharges

Failure to pay tax due for 2010-2011 by the following dates gives rise to surcharges, as follows:

28 February 2012:

5% of the tax unpaid

31 August 2012:

A further 5% of the tax unpaid  

General

The tax based penalties cannot, in total, exceed 100% of the tax liability. But the fixed penalties are chargeable in addition, as are the surcharges for late payment of the tax.

Season's greetings

Certificate of residence - new facility

HMRC has launched an online application facility for those individuals requiring confirmation of their UK tax residency status for the purpose of dealing with overseas tax authorities.

The facility can be accessed here.

PAC: HM Revenue & Customs 2010-2011 Accounts: tax disputes

The House of Commons Committee of Public Accounts has today issued its report on the working of HMRC. The findings of the committee are scathing. 

The full report (166 pages including evidence) is here.  The summary of findings (18 pages) is here.

The HMRC press release, in response, is here.

Non-UK persons - VAT registration

A non-UK person is one not having a business or other fixed establishment in the UK, or being an individual does not have a usual place of residence in the UK.

In Schmelz, in 2010, the ECJ ruled that persons not established in a given EU State were not entitled to the benefit of the VAT registration threshold in that State. Whilst the denial of the threshold was discriminatory, the discrimination relative to domestically established businesses was proportionate and justified on the ground of effective fiscal supervision by Member States.

In consequence, non-UK persons making taxable supplies in the UK of any amount will be obliged to register for UK VAT with effect from 1 December 2012*.  Those persons making taxable supplies which are zero-rated supplies only can be excused from registration, but only following approval by HMRC.  

* Previously proposed to be 1 August 2012.

Seed Enterprise Investment Scheme (SEIS)

It is proposed that a new scheme of relief, modelled closely on the existing Enterprise Investment Scheme (EIS) found at ITA 2007 and TCGA 1992, will be introduced with effect from 6 April 2012 (and continuing through to 5 April 2017, at least).

The new scheme will be known as the Seed Enterprise Investment Scheme (SEIS) and is intended to help smaller, riskier, earlier stage companies; being those, which typically struggle to attract investment in the current economic climate and for which the existing EIS rules provide insufficient incentive to prospective investors.

The company

Inter alia, the company must: be unquoted; be incorporated not earlier than two years before it uses the SEIS; have a UK base; employ not more than the equivalent of 25 full-time employees (including directors); not previously have been involved with the EIS or VCT schemes; have gross assets of not more than £200,000; and must carry on a new qualifying business activity.

In addition, the company cannot be in financial difficulty; thereby, removing the scope for a company to use the SEIS to “re-float” itself by clearing trade debts etc. To be in financial difficulty, for this purpose, means that the company would reasonably be considered to be so within the Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty (2004/C244/02). The Guidelines, already familiar from FA 2010, are here.

A new qualifying business activity is either a qualifying trade or research & development undertaken with a view to a trade. A qualifying trade is one which meets the EIS definition found at ITA 2007, s189. A requirement that the activity be a new one serves to prohibit the extraction of a trade from an existing company, under common ownership, in order to benefit from SEIS.

The maximum the company can raise as investment, and which qualifies for SEIS, is £150,000. Thereafter, further monies can still be raised under EIS, but with the SEIS funds counting towards the overall EIS limits.

The investor

The investor must be an individual, and can be an executive, or non-executive, director of the company, but not merely an employee. He or she, with associates, must not already own, whether through shares, loans or other means, more than 30% of the company. An associate is, broadly, a relative or business partner. 

The individual (including associates) can subscribe for shares representing up to 30% of the company. The shares must be fully paid up ordinary shares but can carry preferential dividend rights.

The individual must not, for three years after the investment, generally receive value back from the company, although some items are permitted; the most commonly found being a reasonable wage paid to a working director, the reimbursement of expenses, and dividends representing a reasonable return on the shares.  

The reliefs        

The investor can claim income tax relief on the amount subscribed for the shares. The relief is given at 50% of the amount subscribed, up to a maximum of £100,000 per tax year. The relief is given at a fixed 50% even though the individual may have a marginal tax rate of less than 50%.  From 2013-2014 onwards, the claim can be “carried back” to the tax year immediately preceding the tax year of investment.

Where capital gains are enjoyed on the disposal of chargeable assets in the 2012-2013 tax year, but in that tax year only, those capital gains are exempt from CGT to the extent that some, or all, of an amount equivalent to the disposal proceeds are invested in SEIS qualifying shares in 2012-2013.

Capital gains enjoyed on the subsequent disposal of SEIS shares, more than 3 years after the investment, are exempt from CGT.

Should the investment be lost, whether in whole or in part, due to the legitimate business failure of the company, the investor can claim for a capital gains tax loss or an income tax loss for the amount of the investment lost by them, after reduction for the 50% income tax relief received.     

General

With the proposed law for SEIS running to 47 pages, and still prone to amendment before its enactment, this might seem somewhat overblown for a scheme that is only going to be of limited application.

Whilst much of the anti-avoidance content is known to us from the EIS code, it might have proved to be more sensible to scale down the detail of the SEIS to make it more user-friendly, and cheaper, to those start-ups companies at which it is aimed.  

The alternative view is that, with companies being able to move onto the use of the EIS once they have exhausted the SEIS, such companies may as well get used to the intricacies of tax favoured investment reliefs sooner rather than later.

Nevertheless, any tax relief specifically targeted at the smaller or newly established business is to be welcomed and will, hopefully, be well received by possible investors. 

Draft legislation for 2012

A draft of proposed legislation to be included in the Finance Bill 2012 was released on 6 December. The draft legislation, together with explanatory notes, can be downloaded here.  Supplementary commentary is here.

Statutory residence test - introduction delayed

The enactment of a statutory test of tax residence for individuals has been delayed. A test will not now be introduced until April 2013 at the earliest.