Press Release - Tackling fraud against the Inland
Revenue
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.
Head of the National Audit Office, Sir John Bourn said
today:
"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."
Notes for Editors
- The Inland Revenue collect around one half of all public
Revenue, £214 billion in direct taxes and National Insurance
Contributions in 2001-02.
- The Special Compliance Office generate around 12-15 times their
costs with some 30 per cent of their additional yield of £337
million in 2001-02 coming from 308 civil investigations of serious
fraud. Civil investigations by the Special Compliance Office of
fraud and non-fraud cases are particularly cost-effective
generating an estimated yield to cost ratio in 2001-02 of
20:1.
- Press notices and reports are available from the date of
publication on the NAO website at http://www.nao.org.uk/ Hard copies can
be obtained from The Stationery Office on 0845 702 3474.
- The Comptroller and Auditor General, Sir John Bourn, is the
head of the National Audit Office employing some 750 staff. He and
the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 14/03
All enquiries to Barry Lester, NAO Press Office:
Tel: 020 7798 7937