Forgive and forget

HMRC’s cost effective approach to tax collection is the result of a lack of resources and may only succeed in shifting lost tax revenue from one category to another, says Robert Maas

The UK has only once granted
a limited amnesty and, as far as I know, has no intention of ever granting a proper one. What the UK offers are disclosure opportunities. This is not simply a difference in terminology; an amnesty involves a waiver of tax.
With disclosure opportunities, HMRC wants every penny of the tax and interest that is due; all that it is offering is minimum penalties and in most cases the avoidance of prosecution where the taxpayer has been fraudulent.

HMRC has largely moved away from tax return enquiries in recent years. There are two reasons for this. First, successive governments have severely slashed the body's resources. HMRC
is around a third of its size compared
to five years ago. Second, they are
under huge pressures from the government to collect tax as it becomes increasingly difficult for the government to reduce costs.

Disclosure opportunities solve both of these issues. They collect significant sums of money using comparatively little HMRC resources; in return for low penalties, the taxpayer is expected to do most of the work in quantifying what is owed. The disadvantage is, of course, that having to rely on a fraudster to tell you what he has stolen is not the most effective way to ensure that the full amount owed is collect.

Offshore opportunities

There have been a number of offshore disclosure opportunities in various jurisdictions: the Offshore Disclosure Facility (ODF), the New Disclosure Opportunity (NDO), the Liechtenstein Disclosure Facility (LDF), and the agreements with Switzerland, Jersey, Guernsey and the Isle of Man. These disclosure facilities are aimed primarily at fraud. They are enticements to those who have hidden funds overseas to come clean and pay the tax due from the past, plus a comparatively small penalty and commitment to report income properly in the future.

With the LDF, HMRC agreed with the Liechtenstein government that they would not look for tax earlier than ten years before the date that they entered into the agreement with Liechtenstein. Due to Liechtenstein's tradition of absolute bank secrecy, HMRC was effectively forced to give this concession in order to get an agreement at all,
but it is still an important agreement. Banks and other financial businesses
in Liechtenstein are prohibited from acting for UK customers unless they obtain independent confirmation from
a UK qualified lawyer or accountant, that either the customer has made
a disclosure under LDF or that his
UK tax affairs are in order so that
no disclosure is needed. In other words, the amnesty was an acceptable price to pay to stop UK residents being able to hide money in Liechtenstein and out of the sight of HMRC. It is unlikely that there is any other country with which HMRC feels a need for such a deal.

The Swiss agreement is not really
a disclosure opportunity. Taxpayers have the option of disclosing to HMRC or keeping their anonymity, and suffering
a withholding tax which is paid over
to HMRC on a no names basis.

Because these disclosure opportunities are aimed at fraud, the penalty is the minimum due for fraud. Accordingly, the use of these facilities may well not be appropriate where the taxpayer did not realise that the overseas income was taxable, so is liable only for lower penalty for failing to take reasonable care. There seems to be a lot of non-UK domiciled taxpayers who have still not realised that the law changed in 2008. Consequently unremitted overseas income, which was previously outside the scope of overseas tax, is now taxable here unless a substantial (up to £50,000) fee is paid to HMRC to be able to use the remittance basis.

The government appears to be getting particularly vicious about offshore tax omissions. In 2010 they doubled the penalties for errors (which includes deliberate non-disclosure) where the error involves an offshore element. If the UK does not have
a full double tax treaty with the country concerned,

Domestic strategy

HMRC has taken a different approach to onshore tax evasion. It has launched a three-pronged attack: campaigns, task forces and the contractual disclosure facility (CDF).

Campaigns

Campaigns are fairly narrow targeted disclosure opportunities. They are not aimed solely, or even primarily, at fraud. They alert a defined category of taxpayers to the possibility that they may have underpaid tax, perhaps because they did not recognise that a particular type of receipt is taxable, and invite them to review their tax position and make good any under-declaration.

The first was the Tax Health Campaign which was aimed at doctors. The starting point was that HMRC believed that many doctors receive fees from insurance companies for medical reports and death certificates.
They used their information powers to obtain details from insurance companies of payments to doctors. From this they believed they learnt which doctors were not declaring such fees (it is not clear how, as this would not necessarily be a specific figure on a doctor's tax return). They then gave doctors a very short (a few weeks) opportunity to come forward and disclose omissions to their tax returns threatening that if they later discovered a doctor had evaded tax, they would seriously onsider prosecution. This was a highly successful approach; it raised £62.9m.

No other campaign has come close to matching it. This may be because doctors evade tax far more than others. Or it may be that to date, six years later, HMRC do not seem to have prosecuted a single doctor who did not respond to the campaign. So HMRC's most potent weapon, the risk of prosecution, appears to be a paper tiger. Of course it takes a long time to prove fraud, so it is unrealistic to expect instant prosecutions. But the tax health plan ended six years ago so one would have expected a string of prosecutions by now.

For whatever the reason the next campaign, this time against plumbers, only raised around £20.3m. Plumbers were chosen because at the time most had to be CORGI registered. Again by obtaining details from CORGI, HMRC thought that they had a good idea of who could be expected to disclose. There have been a few prosecutions of plumbers since the campaign closed, but they have not been highly publicised, perhaps because HMRC doubts that they will obtain much public credibility from prosecuting plumbers and accepting cash settlements from doctors.

Campaigns do however run the risk of being counterproductive. If HMRC launched a campaign aimed at plumbers and later another aimed at electricians, what should carpenters who have evaded tax do? They can come clean to HMRC and pay the normal penalty for tax evasion, or wait until HMRC offers a disclosure facility for carpenters (which is likely to carry a far lower penalty) and hope that HMRC does not find out about them in the meantime. Admittedly, the guidance for the electrician campaign did say that if a person who is not an electrician comes forward and confesses to their sins, they are likely to be offered a similar deal to electricians. But this was not publicised. It was tucked several pages into a document aimed only at electricians which the average carpenter would have been unlikely to read.

HMRC seems to regard campaigns as successful. Leaving aside the medical health check and the tax returns initiative (which raised £81m but is probably not a campaign at all) they are averaging a tax (including interest and penalties) take of around £20m.  Accordingly they are value for money, although they seem to have a decreasing impact. HMRC also seems to be running out of categories of taxpayer for whom they can obtain initial third party information for a small group of providers. They have used their own internal information to target VAT registrations and outstanding tax returns, but approached e-market sellers and sellers of residential property without any initial confirmatory information.

That is not to say that campaigns have run their course. They seem to be a cost effective way to collect undeclared tax liabilities, but also appear to be raising less and less money. 
It is possible, but unlikely, that this is because since the campaigns started, the populace has become more honest. It seems more likely however, that people were initially worried about the threat of prosecution if they did not come forward, but now perceive this as an empty threat.

There is also a problem which HMRC has always been reluctant to address. If someone has thrived in the black economy for the last 20 years, they simply do not have the resources to pay 20 years tax, plus interest and penalties. If that person feels that should they come clean, HMRC will take everything and put their family on the street, then no amount of exhortation is going to induce them to do so. They’re clearly better off doing nothing and taking the risk of being caught, particularly if they have already lived with that risk for 20 years. Only a real amnesty which forgives part of the tax is likely to attract such a person.

HMRC is very guarded about campaigns, wanting not to risk the fact that they are targeting a particular category of persons to leak out before they launch the campaign. It is not
clear why.

Task forces

Task forces hold a vast amount of information and also purchase commercial information databases.
Up until a few years ago, they suffered from information overload. They did not know where to look to find the information they had on a taxpayer, and finally solved their problem with a piece of software: Connect. Connect is an award-winning software tool developed by HMRC, which draws together, in an intelligible form, all of the information they possess about a taxpayer. This is an unbelievably powerful tool. HMRC claims that Connect holds more data than the British library, while revolutionising HMRC's enquiry and investigation processes.

There are two main ways that HMRC uses Connect. The first is to verify and expand on information in relation to an individual taxpayer.
This tool is available to all HMRC enquiry and investigation staff and unearths a great deal of fraud. For example if HMRC decide to check my address and are told by Connect that 30 other people live there also, they are going to investigate this to find out why.

Connect also acts as an effective business comparison tool. For example, it may be used to produce statistics on fish and chip shops in the Liverpool region. A few investigation specialists will then analyse the statistics and if this results in a perception that a significant number may be under-declaring their profits, a task force of investigators will be set up to visit the suspect traders. Libraries of such statistics are being amassed on the premise that the information developed from a Liverpool fish and chip shop for example, could well be indicative of the behaviour of fish and chip shops in Bristol, Manchester, Glasgow and so on.

CDFs

The third prong of HMRC's anti-fraud arsenal is the Contractual Disclosure Facility (CDF). CDF is the latest re-incarnation of what used to be Hansard enquiries. That name, derived from a parliamentary statement in the 1940s, reported in Hansard that if a taxpayer admits that they have under-declared tax and co-operate in reaching
a monetary settlement with HMRC, they will not face prosecution. Hansard was initially operated by Enquiry Branch, a specialist investigation division of the old Inland Revenue. This has since become a small part of the HMRC Specialist Investigation Division.

The procedure has always been targeted at cases of suspected serious fraud. HMRC normally approaches
a taxpayer, and tells them that they are suspected of serious fraud, and offer an opportunity of co-operation. In the past the taxpayer had to admit that there was something wrong with their tax returns, but did not have to say whether that something was fraudulent, accidental or careless. Now HMRC will not accept a CDF case unless the taxpayer first admits fraud - or to be precise, deliberate conduct that HMRC are likely to believe that has brought about a loss
of tax, which is equivalent to fraud
in 99.9 per cent of cases. A taxpayer does not have to wait to be asked as they have the option of approaching HMRC and asking for a CDF. If the tax payer does so, HMRC will not automatically agree. Firstly they will generally want to make sure that they are not already lining up the taxpayer for prosecution, and also want to be sure that the figures involved are large enough to justify the use of their specialist resources.

Together, these initiatives mark a fundamental change in HMRC's approach. They are exhorting taxpayers to come forward and hand over the money that they owe in respect of undeclared income of past years, but seem to be doing very little of the traditional routine enquiries to check whether the amounts that are declared on tax returns is an accurate assessment of the tax due. While the new approach is undoubtedly cost effective for HMRC, it remains to be seen whether it will result in the right amount of tax being collected. The new approach may be simply shifting the tax lost from one category of taxpayer to another.

Robert Maas is a consultant at CBW Tax and is the author of Guide to Taxpayers' Rights and HMRC Powers