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].  

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

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.

The facility can be accessed here.

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.

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.

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. 

The first edition of the provisions, published in 1992, will remain relevant where already incorporated in a will, and can be downloaded here.

The report covers anti money laundering practices in 40 jurisdictions, focusing on the identity of beneficial owners.

It was found that compliance in offshore centres was often of a higher standard than displayed in onshore jurisdictions. Further, and contrary to the inexpert views expressed by some political commentators, trusts rarely figured in abuses and that the vehicles of choice for laundering illicit funds were far more likely to be companies. 

The report can be downloaded here. 

The report by Graham Aaronson QC was published on 21 November 2011. The Government will respond to the report at Budget 2012 and has committed not to introduce a GAAR without further formal public consultation.

The terms of reference, report and related items can be downloaded here.

Download here  QI on tax  (75MB)

A bankruptcy restriction order (BRO) can be ordered by the court where, since April 2004, an individual’s conduct leading to his bankruptcy is considered blameworthy or irresponsible.

A BRO can be applied for by the official receiver, with the encouragement of HMRC and, indeed, other government agencies. If awarded by the court, the BRO will last between a minimum of two years and a maximum of 15 years. The order can, and often will, therefore, outlast the individual’s actual bankruptcy and, for most practical intents and purposes, extend the downsides to bankruptcy past the usual 12 month period for which bankruptcy exists since 2004.

The BRO, the criteria for which are similar to those for disqualification under the Company Directors Disqualification Act 1986, will prevent an individual from being a limited company director or a member of a limited liability partnership, or from acting in a shadow capacity.

The individual will be severely constrained, although not barred, in the operation of an unincorporated business and will be able to obtain only limited credit facilities.

Further, the individual will be prohibited from holding an existing, or new, public office or trusteeship, and from continuing to act as the donee under the now obsolescent rules for lasting powers of attorney.  

A BRO can be applied for within one year of the individual’s bankruptcy commencing, or at later date if the court grants permission for the late application. In extreme instances, where it is in the public interest, an interim BRO can be applied for in anticipation of the individual being adjudged bankrupt.

Upon the making of an application for a BRO, the court is obliged to consider whether the order is appropriate in the light of the bankrupt’s conduct. The court has a general discretion over what aspects of the bankrupt’s conduct is relevant but the court is, in any event, bound to consider various kinds of prescribed behaviour.

These include: failures to keep, or to produce, financial records; entering into transactions at undervalue or preferences; making excessive pension contributions; failures to provide goods or services following payment; trading whilst insolvent and unable to service debts; incurring debts which were not realistically serviceable; failing to explain depletions in wealth; gambling and equivalent risk taking which contributed to the bankruptcy; fraud or fraudulent breach of trust; and neglect to business affairs which may have contributed to, or increased the extent of, the bankruptcy.

In addition, the court must take into account the circumstances of any prior bankruptcy falling within the previous six years.

As a rule of thumb, a BRO will be appropriate where, in the court’s opinion, the bankrupt’s conduct exhibits a failure in some significant respect to live up to proper standards of competence or probity in the conduct of one’s financial affairs.

If, upon considering the bankrupt’s conduct, a BRO is, indeed, considered appropriate, the court has no further discretionary but is then obliged to make a BRO for a minimum of two years. The absence of a general discretion for the court is due to parliament considering that such orders are necessary both to protect the public against irresponsible financial conduct and to deter other persons from engaging in similar conduct.

Here, the rules for BROs display a similar thinking to those applying to confiscation orders under the Proceeds of Crime Act 2002. In both instances, it has to be arguable whether the draconian nature of the laws have the purported deterrent effect when the rules are largely unknown by the public at large.  

Once a BRO is due, the only remaining issue is the term for which the order should be awarded.

Here, the approach will mirror the approach adopted when disqualifying individuals from acting as directors under the 1986 Act; with the court working within broad ranges of two to five years, five to 10 years, and 10 to 15 years, depending upon the severity of the bankrupt’s undesirable conduct and any mitigating factors.

In the context of tax, an intentional or wreckless attempt by an individual, whether in fact or in perception, to avoid a liability to pay HMRC by opting instead for bankruptcy will, in theory at least, bring the rules for BRO into play.

In many instances, where the individual has acted with sincerity but nevertheless failed to meet his obligations due to factors outside of his control, be it the state of the economy or illness etc., a BRO will not be in point and the individual should, quite rightly, expect to be given a clean slate after their discharge from a 12 month bankruptcy. 

In other cases, where an individual's conduct is considered less than upstanding, an expectation that unpaid taxes can be avoided by the expediency of bankruptcy (a personal pheonix-ing, if you like) may prove to be unfounded if HMRC continue to encourage the Official Receiver in its making of applications for BROs; in which case, the consequences to the individual of the bankruptcy could well prove to last up to 15 years rather than a mere 12 months.