The Public Accounts Committee have issued their Sixth Report of 2015-16, reviewing the performance of HMRC in 2014-15, detailing a series of urgent recommendations.
The damning report has identified a number of areas of concern, in particular the lack of prosecutions for offshore tax evasion and the abysmal level of customer service, potentially impacting on the collection of tax revenues.
Number of prosecutions
The report found that the number of criminal prosecutions in relation to offshore tax evasion was ‘woefully inadequate’. Despite a previous recommendation made in December 2013 there was little evidence that HMRC had taken the necessary measures to target individuals and companies who deliberately evaded tax. Since 2010 there had been just 11 prosecutions relating to offshore tax evasion, with only one resulting from the Falciani list (of around 3,600 UK taxpayers who held Swiss accounts with HSBC). Meg Hillier MP, Chair of the PAC, said:
‘We are deeply disappointed at the low number of prosecutions by HMRC for tax evasion. We believe it is important for HMRC to send a clear message to those who seek to evade tax that the penalties will be severe and public. It’s also important that the majority who play by the rules, paying their tax on time and in full, see that those who don’t will face the consequences.’
The PAC have recommended that HMRC strengthen their capability to investigate overseas tax evasion, and steps have already been taken on this, with the early closure of the Liechtenstein Disclosure Facility on 31 December 2015. HMRC were advised that they should toughen the civil and criminal sanctions in these cases and make clear their intentions to crack down on those who remain outside the law by following through with the threat of prosecution.
We fully expect HMRC to ‘grasp the nettle’ and initiate significantly more criminal investigations in the next two years to show to UK resident individuals and companies that the risk far outweighs the potential benefits of attempting to evade tax. This may reduce the tax recovered in the short-term, the question is will it deter people from evading taxes going forward?
The level of customer service currently provided by HMRC is well below the expectations of the PAC and as things stand there is no indication as to when this is likely to improve. In 2011-12 HMRC answered just 74% of the calls made to their contact centres, leading the PAC to conclude that they had “an abysmal record on customer service”. Over the first half of 2015 this fell to 50%, with HMRC answering just 39% of calls within five minutes.
There appears to be little from HMRC in the way of a formulated plan as to how to improve the levels of customer service and the PAC have expressed serious concerns as to the impact this will have on taxpayers receiving the help they need to pay the correct amount of tax.
Alongside offshore evasion, tax avoidance remains a serious concern. The PAC consider that HMRC are failing to identify and report the value of tax avoidance schemes, thus making it impossible for Parliament to take a view on whether tax law is working as intended. The report recommends that HMRC improve in this respect going forward, gathering the relevant intelligence and including an estimate of the value of schemes that have been challenged but ultimately judged to be legal by the courts. This would allow Parliament to consider the current scale of the problem and identify how tax law may be improved
Transparent yield reports
The report has criticised HMRC for the complexity of their Annual Report in relation to compliance yield. It was identified that the figure included as yield was not in fact cash collected but rather was a number factoring in various debts, estimates, losses incurred and future figures.
The report recommendations on improving the levels of customer service and producing clearer yield reports are on the whole positive in every sense, seeking to put in place measures by which HMRC are more readily available to assist taxpayers and ensure that the correct tax is paid to the Exchequer.
However, those recommendations made in relation to tax evasion and avoidance, whether offshore or domestic, indicate a strong expectation that HMRC ramp up their response, specifically with a view to an increase in the level of criminal prosecutions. The pressure now placed on HMRC to see these recommendations through is of potentially serious concern to anyone who may have issues relating to overseas assets. The proportion of those affected who can be said to have knowingly evaded tax is likely to be very small, rather there may be those who inherited overseas funds or received poor advice in earlier years. The concern is whether these individuals will be treated more leniently by HMRC or tarred with the same brush as those who have acted deliberately in falsifying their UK tax returns. In a desperate bid to up the number of prosecutions, and prove that they are prepared to use whatever powers necessary, there is a real threat that HMRC will look through individual circumstances and come down hard on any taxpayer with overseas issues.
If you have a query regarding this report or have concerns relating to an overseas tax issue or tax avoidance planning, please call TaxDesk on 0845 4900 509 and ask for Isobel Clift.