The number of prosecutions for complex tax fraud has fallen, but is this bad?

In September 2010 the Government pledged to make funding available, to ensure that prosecutions would be increased five-fold; and then, in January 2013, that target was expanded to a seven-fold increase. Fieldfisher has tracked (and reported on) HMRC's progress in respect of the Government's publicised ambition to increase dramatically the number of criminal prosecutions for tax fraud over a number of years.

In posts on the tax deductions blog we previously explained that there are a number of figures that Fieldfisher tracks that reveal the extent of HMRC's criminal investigations activity, and the extent of its success (or failure):

1. search warrants executed by HMRC ("raids");

2. decisions by the CPS to charge for tax offences ("decisions to prosecute");

3. individuals prosecuted ("prosecutions"); and

4. convictions for tax offences in the courts ("convictions").

All four are tracked because each arises at a different stage in the criminal investigation cycle. It often takes at least a year between a raid and a decision to prosecute, and often more than that between a decision to prosecute and trial. And, we are aware of examples where there has been a conviction more than 7 years after the raid took place. Such variable time lags make interpretation of the data difficult. 

We have obtained, by way of requests over the years under the Freedom of Information Act, figures for the eight tax years from 2011/12 to 2018/19 using these definitions (these figures exclude tax credits offences).
 

Year	Raids	Decisions to Prosecute	Prosecutions	Convictions
2011/12	657	430	364	333
2012/13	787	664	471	439
2013/14	784	874	713	674
2014/15	759	1247	681	617
2015/16	761	1065	843	773
2016/17	752	1063	844	767
2017/18	641	946	896	815
2018/19	495	831	749	648

 
In graphical form:



Whilst, as we said above, interpreting the data is not straightforward, what is clear is that the Government has fallen well short of its targets.

Since 2015/16, the number of raids undertaken has fallen year on year, with the most significant decrease being between 2017/18 and 2018/19. The 2018/19 figure is the lowest since we started monitoring. This could be, at least in part, because of a new approach to information gathering by HMRC. HMRC has software that analyses information that is available from a variety of sources. Those sources include, for example, the Land Registry, letting agents and online auction sites, as well as tax information exchange agreements with other countries, including the wide-reaching Common Reporting Standard. That information has been used by HMRC to issue "nudge letters" to various categories of taxpayer, including, for example, individuals who have non UK assets. The nudge letters (which have dubious legal basis) warn taxpayers that HMRC has concluded that tax has been understated and 'invite' them to complete a certificate of tax position.

The continued, year on year, fall in the number of raids does suggest that we were correct to conclude last year that HMRC is reducing its focus on this method of gathering information as a precursor to criminal prosecutions for tax fraud. 

Decisions to prosecute are, as we expected, down. The numbers were relatively consistent as between 2015/16 and 2016/17, but then fell as between 2017/18 and 2018/19. If the number of raids continues to decline, then it is reasonable to expect a concomitant decline in the number of decisions to prosecute (albeit with a time lag). We expect this number to fall again next year.

In past posts on the Fieldfisher tax blog, we said that we expected to see the number of prosecutions stall or fall in this year's figures, given the decline in the number of raids and decisions to prosecute. That has occurred. The number of prosecutions has fallen substantially: from 896 to 749. It is the first decrease since between 2013/14 and 2014/15, when there was a small reduction in the number. This is a much more significant decrease: of more than 15%.

Convictions are down by 20% on 2017/18, reflecting a smaller number of prosecutions and, it seems, an increase in the acquittal rate. We are aware of a number of recent high profile acquittals.

So, with many fewer raids, many fewer decisions to prosecute, many fewer prosecutions, and many fewer convictions, does this mean that HMRC and the CPS have 'given up' on using criminal investigations into tax related matters as a way of changing taxpayer behaviours? We think not.

First, it needs to be recognised that criminal tax evasion is estimated to give rise to only c.15% of the "tax gap" (the difference between the tax that HMRC think should be paid and what the Exchequer collects). Carelessness (or "failure to take reasonable care") remains the largest single element of the tax gap. Reducing that element, with measures such as Making Tax Digital, is (rightly) a key focus of HMRC.

Secondly, successful prosecutions are the tip of HMRC's iceberg of criminal investigations activity. Complex tax fraud prosecutions, whether successful or unsuccessful, come at a vast cost to the public purse; pursuing a criminal prosecution for many years is extremely resource-intensive; so they are rightly reserved for cases where HMRC considers that it needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate An example is the prosecutions in relation to a UK film project called Starsuckers. The scam involved an 'active' film partnership claiming to have spent millions of pounds and thousands of hours on a film project and to have made significant financial losses, for which tax relief was sought. The promoter of the scheme, Terence Sefton Potter, a financial adviser, Neil Williams Denton, the producers and a number of investors were all convicted of cheating the public revenue (and sentenced to lengthy terms of imprisonment). The convictions of the investors provided a stark warning to high net worth individuals who may be contemplating investing in schemes that seem to be 'too good to be true'. And everyone should be aware that unsuccessful prosecutions also come with a significant cost to the accused. Taxpayers who are in the regulated sector (such as bankers, lawyers or accountants) will, almost certainly, lose their jobs on charge and rarely are able to return to those jobs on acquittal.

Thirdly, there may be fewer prosecutions because there has been less criminal activity. Whilst determining whether or not that is the case from the statistics is impossible, our view is that lessons have been learned. Anecdotally it does seem that there have been real changes in taxpayer behaviours. And, we consider (as, it seems, do HMRC and the CPS) that the threat of corporate criminal prosecutions for failing to prevent the facilitation of tax evasion, and the much enhanced penalties for mis-declaration of individuals' taxes (of up to 200% of the tax due) constitute very effective deterrents. And so in that sense, HMRC's prosecutions policy has been a success.

With special thanks to Ellen Austin, solicitor apprentice, for her contribution to this blog.