According to HMRC, tax fraud is when ‘someone pays too little tax or wrongly claims a tax repayment by acting dishonestly. Tax fraud is not about negligence; it must be a deliberate act’.
Tax fraud could, therefore, be committed by an individual that does not tell HMRC about their income, or by businesses failing to register for VAT when they should, or businesses illegitimately charging their customers VAT. Employers can commit tax fraud if they pay their employees ‘cash in hand’ (i.e. without deducting tax and National Insurance contributions) and individuals can commit tax fraud when they attempt to smuggle goods like alcohol and tobacco into the UK.
Criminal investigation of fraud is reserved for a minority of cases where HMRC need to send a strong deterrent message and/or where the conduct involved is such that only a criminal sanction is appropriate. Following the merger of the Inland Revenue and Customs & Excise to form HMRC in April 2005, an independent prosecuting body was created: the Revenue and Customs Prosecutions Office (RCPO). The RCPO was subsequently merged with the Crown Prosecution Service to become a specialist Revenue and Customs Division (RCD) within the CPS. The RCD is responsible for prosecuting all HMRC criminal cases.
In the vast majority of cases, investigations are undertaken using civil procedures. The investigation will be handled by HMRC's Special Civil Investigations Office under their code of practice COP 9.
The taxpayer will usually be professionally represented. Interviews between the client and HMRC are conducted using a Civil Investigations of Fraud procedure as set out in COP 9. Such interviews cover both direct and indirect taxes where appropriate. Where the Civil Investigation procedure is used, there will not be a subsequent criminal prosecution for the original tax offence, but a taxpayer may still be prosecuted if he makes materially false statements or provides materially false documents with an intent to deceive during the investigation. HMRC will have provided the taxpayer with a copy of COP 9 before the interview. At the interview they will explain their practice in cases of suspected serious fraud and state that they will accept a money settlement and will not pursue a criminal prosecution if the taxpayer makes a full and complete confession of all tax irregularities. It is up to the taxpayer whether he co-operates with the investigation. If he does not, and evidence of provable fraud is uncovered, the risk of prosecution will have been increased substantially. HMRC will put five formal questions to the taxpayer concerning the accuracy of tax returns relating to direct taxes and, where relevant, four formal questions relating to VAT. The COP 9 procedure gives the taxpayer certainty that he will be able to put his tax affairs in order by making a full disclosure and paying the understated tax, interest and penalties.
Where serious fraud is not suspected, HMRC will usually invite the taxpayer to co-operate in establishing the understated income or gains. Where co-operation is provided, they will then not normally have to resort to their statutory powers to call for documents and to enter and search premises.