Tax Evasion and Tax Fraud

Gary Green
Gary Green
August 6, 2023

Although most people in the UK are happy to follow the law and ensure their taxes are paid correctly, some people are deliberately dishonest and defraud HMRC intentionally by evading payment of tax, cheating the system or even stealing public funds. HMRC is, of course, keen to crack down on tax evasion and tax fraud. However, there can be some confusion about the differences between these two terms. Here we take a closer look at both and how they are dealt with by HMRC. 

Tax Fraud – An Overview

Fraud is defined by HMRC as a deliberate concealment, misinterpretation, or omission of information. It may also refer to the deceptive or false presentation of circumstances or information to gain tax advantages. 

Several types of illegal activities are covered by the term tax fraud including, but not exhaustive:

  • The deliberate submission of a false tax return.
  • A false claim for reliefs or repayments. 
  • The hiding of wealth, gains, or income offshore.
  • Smuggling of taxable goods. 

How Does HMRC Deal With Tax Fraud?

HMRC believes that the best way of tackling tax fraud is to prevent it from occurring at all. They achieve this by building controls and checks into their systems, by introducing legislation that makes it impossible or more difficult to carry out tax fraud, and by working with companies to enable them to identify when they could be at risk of experiencing tax fraud.

In cases where tax fraud has already occurred, HMRC has a range of specialist investigation powers that allow them to uncover cases of fraud in even the most determined and complex circumstances, and then bring the various perpetrators to justice.

In most cases, HMRC tackles tax fraud by using civil powers that enable them to obtain the necessary information to identify unpaid tax and take steps to collect it. They can also impose a financial penalty on those who can be held responsible for as much as 200% of the amount of tax due.

In the most serious cases, however, HMRC uses the COP9 (Code of Practice 9) approach. If individuals admit their dishonesty and pay the tax owed together with a significant financial penalty, they can avoid facing criminal investigation proceedings.

Criminal Investigation

In specific cases, HMRC will carry out a criminal investigation if the fraud is especially serious, involving significant losses, or where the individuals or conduct involved merits the strongest possible response. HMRC may take this action when they tackle a certain kind of fraud, target a specific business sector or deal with organised crime. 

If HMRC lacks sufficient civil powers to reveal the truth of the matter or recover the missing tax payments, they can also launch a criminal investigation. These cases are often time consuming and costly and, therefore, are only used selectively.

Collecting Owed Amounts 

Whichever approach HMRC takes, they always attempt to recover all monies owed. Whenever possible they do this by issuing a tax assessment or by reaching an agreement with the taxpayer for the total amount of owed tax together with the application of a penalty and interest. 

There is, however, a Proceeds of Crime Act, which can also be enacted in order to allow HMRC to identify and confiscate the assets of anyone convicted of having committed tax fraud. An Account Freezing Order is another option that HMRC may use to effectively and swiftly freeze money in a suspect bank account in order to prevent the fraudster from transferring their funds. 

Tax Evasion – An Overview

Tax evasion is not the same thing as tax fraud. Rather, it is the dishonest and deliberate attempt to avoid paying the amount of tax that is owed. It can cover several types of tax evasion, including excise duty, custom duty, VAT, and income tax. As an illegal activity, tax evasion can have serious consequences if you are found guilty. You could receive a financial penalty or even imprisonment. 

What Is Tax Evasion?

Tax evasion can be committed in several ways: 

  • Cash in hand transactions and cryptocurrency transactions that are made to deliberately avoid leaving a traceable record and, thus, avoid paying the tax on that income. 
  • Failing to report trading income that would be due for tax including hiding trading revenues overseas or failure to file a tax return. 
  • Claiming falsely for expenses.
  • Importing goods that are VAT-free and then selling them on to a customer with VAT added before failing to report the HMRC the VAT that was charged.
  • A failure to declare or undervaluation of imported goods to evade payment of import duties. 
  • Assuming someone else’s identity to carry out a taxable transaction using their name.
  • Participating in a structured tax avoidance purchasing scheme to save on tax. 

How Do I Know If I Am Under Investigation For Tax Evasion?

If HMRC decides to investigate you for evasion of tax, you will receive a letter to notify you. There is no form of appeal against investigation. Therefore, if you get a letter that informs you that you will be the subject of a tax evasion investigation you should always take professional legal advice from a specialist. HMRC has to demonstrate that a taxpayer has withheld information knowingly from themselves with the specific aim of avoiding payment of tax for someone to receive a guilty verdict for tax evasion. 

What Is The Consequence Of Tax Evasion?

As tax evasion is deemed to be a serious crime, it carries significant penalties and anyone who is found guilty of this crime may be given a fine or even a prison sentence. HMRC can use both civil and criminal procedures to pursue those who are suspected of committing tax evasion, and this enables them to potentially pursue even more cases, and secure more revenue. 

As both tax evasion and tax fraud are extremely serious, it is imperative to take professional advice if you receive notice that you are being investigated for either. Of course, it stands to reason that the best course of action is to ensure that your tax affairs are always in order in the first place to avoid such an investigation being launched. 

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