"It is important that the Inland Revenue have a clear view of the risks and scale of external fraud and the resources and approaches they are going to use to tackle them, for even a small percentage loss to fraud could amount to billions of pounds. "The use of offshore accounts and structures to commit tax fraud is a particular concern. While acknowledging the challenges faced by the Revenue in tackling fraud, and the many useful initiatives and techniques they are developing and implementing to tackle the problem, my report identifies good practices and opportunities for reducing fraud further."
"It is important that the Inland Revenue have a clear view of the risks and scale of external fraud and the resources and approaches they are going to use to tackle them, for even a small percentage loss to fraud could amount to billions of pounds.
"The use of offshore accounts and structures to commit tax fraud is a particular concern. While acknowledging the challenges faced by the Revenue in tackling fraud, and the many useful initiatives and techniques they are developing and implementing to tackle the problem, my report identifies good practices and opportunities for reducing fraud further."
Head of the National Audit Office, Sir John Bourn, 28 February 2003
The Inland Revenue face real threats of fraud and continued efforts are required to tackle the problem, according to a National Audit Office report to Parliament published today. It is important that the Revenue have a clear view of the resources and approaches they are going to use to tackle those risks. They should increase their prosecution activity, including use of the new offence of evading income tax and they should use greater publicity to change public attitudes to fraud and to heighten the fear of detection.
To encourage compliance the Revenue seek to use both traditional enforcement activities and enabling activities such as providing greater education and support to customers. During 2002 the Revenue started developing an explicit fraud strategy as part of their wider compliance strategy, aimed at clarifying accountabilities and ensuring the risks of tax and tax credit fraud are understood and acted upon appropriately by all operational areas.
There are acknowledged difficulties in reliably measuring the size of the ‘tax gap’ – the difference between 100 per cent tax compliance and actual compliance – and the proportion of this that is explained by tax fraud. Factors that make this difficult include the problem of determining the scale of taxable activities in the shadow economy and the use of cash transactions and offshore accounts and structures to conceal taxable assets and transactions. It is therefore difficult to assess the effects of the Revenue’s efforts to tackle tax fraud in the absence of any overall estimate of the problem. In line with the approaches adopted by other fiscal authorities the Revenue are concentrating on improving their understanding of why and where fraud occurs, for example, through enquiries on random samples of tax returns. The Revenue should continue to implement and refine such techniques, carrying the results through to performance measures and outcomes, and developing targets for reducing the value of tax at risk.
The Revenue tackle fraud mainly through non-criminal investigation of cases with a view to the recovery of unpaid taxes together with financial penalties up to 100% of tax evaded. This approach is cost-effective and is backed up by the Revenue’s selective prosecution policy. Each year just over 60 individuals are prosecuted for fraud, achieving a 75 per cent conviction rate with the majority of those convicted facing custodial sentences. Criminal prosecutions are concentrated on the higher value and more complex cases, the majority involving individuals involved in small and medium sized enterprises with ownership or control over the business or access to and control over cash, or professionals such as accountants, tax advisors and solicitors.
The Revenue should extend both the number and coverage of its criminal prosecutions to ensure deterrence is maintained across the whole of its customer base. Increased use of the new offence of evading income tax, implemented in January 2001, should assist in this.
The 301 specialist fraud investigators of the Revenue’s Special Compliance Office have been particularly innovative in developing the leads that arise out of existing serious fraud cases. But it is essential that the Office have sufficient resources and experienced staff if they are to respond to new opportunities, and continue to develop as a major investigative unit while maintaining their quality standards.
As the new Child Tax Credit and Working Tax Credit are introduced, annual expenditure on all tax credits is forecast to exceed £15 billion by 2003-04. The Revenue is making progress in implementing non-compliance work: for example, the proportion of cases where non-compliance has been detected and the additional yield identified has doubled between 2000-01 and 2001-02. A number of improvements and changes have also been introduced in systems and as part of the new tax credits legislation. It is difficult to assess the effects of this work in the absence of any overall estimate of tax credit non-compliance and fraud.
It is vital that new types of fraud are identified and acted upon promptly and that effective counter measures are developed proactively. The Revenue have taken action to tackle and prevent emerging threats of fraud. For example, the fraudulent early liberation of individuals’ preserved pension funds (‘pension busting’), first emerged in 2000 as a significant threat to the tax treatment of over £1,200 billion of savings in UK approved pension fund schemes. As at August 2002, 12 ‘pension busting’ schemes involving around 1,350 individuals were under investigation, including two where criminal charges have been brought. In all, an estimated total of between £80 million to £100 million of pension funds have been liberated, entailing an estimated tax loss to the Revenue of approximately £35 million for which recovery is being sought. As well as investigating and prosecuting fraudulent pension busting schemes, the Revenue have worked closely with the pensions industry to tighten regulatory procedures.
The Revenue are concerned that services offered by financial institutions have been exploited by taxpayers to transfer funds offshore for the purpose of committing significant and systematic tax fraud. For example, in one project the Special Compliance Office discovered that 500 individuals committed an estimated £90 million in tax fraud by concealing their transfers of funds offshore. The Revenue have no firm estimate of the level of funds held in offshore accounts that might be chargeable for tax, but they consider it likely that significant numbers of related tax frauds remain undetected. Through closer working with other agencies and authorities in tax havens the Revenue have in the last four years developed and improved sources of intelligence. The Revenue must continue to work closely with the banking and credit card industry, and professional representative bodies, to tackle the problems associated with offshore accounts and structures and realise the full potential benefits of new reporting requirements under the Proceeds of Crime Act 2002.
The Revenue need to take action to tackle the use of offshore accounts and structures to commit tax fraud and ensure that the consequences for those successfully prosecuted are widely understood. More generally, they should make greater use of publicity to heighten awareness and change public attitudes to the problems of fraud and raise the profile of their counter-fraud activities to heighten the fear of detection.
ISBN: 010292077X [Buy from TSO]
HC: 429 2002-2003