Mark Jenner & Co – Forensic Accounting Services

Tax fraud is a massive subject area. I have addressed Missing Trader Intra Community (MTIC) VAT fraud in a separate article as it is a huge subject in its own right, responsible over the past decade for absorbing many £billions of tax payers’ money that should rightfully belong within the Treasury’s coffers.  Tax fraud hits all other areas of taxation in the same way as it does VAT and duties – corporation tax, inheritance tax, capital gains tax, income tax – all suffer from the criminals’ attention.

At Mark Jenner & Co tax fraud cases are investigated on a regular basis. In fact it is true to say that most frauds will have some element of tax fraud within them, even if they are not solely a fraud targeted at HM Revenue & Customs (HMRC). We can help in cases where criminal tax evasion is alleged, as such matters often require expert accounting input to unravel the financial transactions behind the fraud and present them within any trial or hearing. In civil tax investigations we are able to do a similar job, by identifying and quantifying profits and expenditure that may have been misunderstood by HMRC.

One of the biggest tax frauds we have come across in recent years, other than VAT fraud, is the prevalence of “black economy” businesses that seem to have a blatant disrespect for the tax regulators altogether. We all hate paying tax, but as they say there is nothing more certain than tax or death! An example of a business set up to simply make money for the owner without regard for any regulation is a support publisher (please note that there are legitimate companies that do “support publishing” but the type I am describing are fraudsters through and through).

Anybody can set up such a business – you simply need a reasonably respectable business image, a bank account and a telephone with a recording facility. Most crooks will set up a limited company as this “appears” to be more official. The next step is to start working your way through the yellow pages and adverts in local papers, targeting smaller businesses to place advertisements in a “good cause” or charity booklet/diary/wall planner. Within months the business will have moved from the principal’s bedroom or study to a rented office with perhaps a dozen or more telesales operatives selling advertising space to customers.

The telesales operatives will all be working on a self employed basis – and we have found that many of these will also be claiming benefit and not declaring their telesales income! They are generally paid in cash and, short of a spot visit by HMRC to the business, there is no way of catching these people out. They always use aliases for the business records and it would be difficult to prove their earnings. We contacted a senior member of HMRC about this matter and were told that there was nothing they could do and that the problem would have to be dealt with by legislation.

A further problem within these sorts of businesses is caused by the owner. Their business model is dubious of course and Companies Investigation Branch of the Insolvency Service is always closing them down. But while they are operating, often for many months or even a year or more, their owners are collecting large sums of money with very little more than the telesales operatives as overheads. They also tend to take money out of the business in cash, by putting down some fictitious self employed employees on their books.

If these fraudsters get caught they may be shut down and even be very unlucky if they are disqualified as directors. However, they simply start up again, using a different company and if needs be, using nominee directors and shareholders.

A CULTURE OF TAX EVASION

There are many people who do not pay tax. Often a culture emerges in a particular place. Many countries traditionally had a large proportion of the populace who did not pay tax. The UK was not one of the worst offenders but with the global migration problem now has substantial problems with ethnic groups or areas of the population where a distinct tax avoidance culture is strong. The support publishing problem has developed a large workforce of participants in the North West of England with the skills needed to work the scam and set up new businesses. In West Yorkshire it became apparent that a large number of the Asian Community were living beyond any obvious means of wealth and investigations revealed that many households had several untaxed streams of income.

Confusion by the authorities over Asian or Eastern European names has meant that tax evasion frauds growing up in these communities have been hard to police. The ease with which passports can be obtained, swapped or bought, together with the weak and liberal UK border controls has meant that perpetrators can easily dissappear for a while if the authorities start closing in. This is extremely frustrating for the fraud regulators and naturally leads to an over zealous attitude when some culprits are caught. This is why the regulatory defence team often turns to the forensic accountant to unravel the complexity of the tax fraud – or to demonstrate that profits are not as high as initially thought.

Tax fraud causes the rest of us to pay more in tax and reduces the income for the public purse.  When public servants are facing redundancies as a result of the harsh cutbacks being imposed, and everybody is suffering from the economic downturn, it is particularly frustrating to see the extent of tax fraud on the rise.

There has always been a significant use of tax legislation in the fight against serious and organised crime.  Al Capone was a raketeer, an extortionist and a murderer, yet was put behind bars for tax evasion.  Since the Proceeds of Crime Act 2002 this has become a common place theme and many criminals large and small who think they are in for an easy option by pleading to the seemingly lesser charges of tax fraud may be in for a a rude awakening when confiscation proceedings kick in.

So long as the tax authorities pursue a civil route with their investigations, a tax ”avoider” or “evader” may look forward to paying the tax and penalties but escape the wrath of the criminal courts.  Once the criminal route is taken all bets are off!

I was involved in a case a couple of years ago involving a Hawala banker being investigated by NCIS in association with HMRC – such collaborative investigations are commonplace especially these days.  NCIS were investigating a gang of suspected drug traffickers and HMRC were looking at the unpaid tax by those suspected of laundering the money.

This Hawala banker had 40 bank accounts through which some £40,000,000 of funds were transferred over a four year period. Yet his tax returns showed that he was earning next to nothing!  HMRC decided to calculate his likely profits by considering two different ways in which the Hawalador might be making a profit:

• The difference between income and expenditure – thus giving an overall profit or margin
• As a % of money taken in for onward transmission

Both are very valid ways of roughly estimating levels of profit – on their own - only HMRC decided to add the results of both methods together and claim double the tax was owed!

That was one big clanger – then my examination of their workings showed that even in their actual calculations they had made 70 different and material arithmetical errors.

HMRC originally suggested that £1,000,000 was owed in tax.  I said it was likely to be around £30,000 to £100,000, at least £30,000 of which had already been paid by the Hawalador (i.e. it was possible that nothing was owed).  HMRC promptly dropped the claim within the criminal proceedings.

The Hawalador pleaded guilty to money laundering on the basis that subsequent confiscation proceedings would be limited to the meagre assets that he currently owned.  NCIS accepted this and the defendant went to prison for a short while.

Meanwhile HMRC passed the files to another of their departments who promptly put in a claim for the top level figure I had calculated (£100,000) in the full knowledge that the defendant had already had all his available assets confiscated.  The only outcome that could be obtained would be a judgement for the debt resulting in bankruptcy.

Now the defendant had been jailed and had lost everything – a good thing too – in a proportionate outcome as an unwitting and unexcusable negligent participant in crime.  What purpose was served in bankrupting him after the fact is not easily answered and the overall cost to the public purse should have been considered.

Two main lessons can be taken from this case that I was involved in:

1. It pays to examine and investigate any tax assessment raised by HMRC if they are using estimated means

2. HMRC can be quite tennacious in pursuing a result – it may pay to argue with them but please ensure that you are polite, reasonable, timely and measured in all your responses!

The various forms of taxation are components making up a very complex area involving extensive legislation and case law. Its complexity makes it very much a specialist subject within both the legal and accountancy professions. Investigating tax fraud is an even more specialist subject within the field.

Such complexity and variation means that it is no wonder that problems continually arise with the interpretation of the relevant statutes or case precedents. The lay clients, the tax payers, often do not appreciate the wide ranging issues and interconnection between income tax, corporation tax, inheritance tax, VAT, capital gains tax, stamp duty, land duty, import duty and national insurance contributions. Add to that any international tax or offshore issues and it is easy to see how the complexity arises.

With the rise in wealth globally together with the interconnectivity of businesses and individuals wherever they live or work, there has been a corresponding growth in the quasi legal tax avoidance industry. Tax minimising schemes are continually being challenged by the tax authorities and new ones established in their place.

Not all challenges by the authorities are valid, and where evasion is being alleged in an otherwise legal scheme, expert assistance in tax fraud resolution is required. HMRC often make sweeping assumptions that assume great rafts of profit have been made. Forensic accountancy is needed to investigate the alleged fraud, unpick the assumptions and present a clear and accurate case for the defendant.

This forensic assistance is especially necessary in the arena of civil confiscation orders that are increasingly being sought by HMRC as a way to claw back tax that they believe ought to have been paid. The Proceeds of Crime Act 2002 has given robust (some say draconian) powers to the authorities to make assumptions about anybody’s income, that it has not been legitimately earned and must be delivered up as either proceeds of crime or alternatively the tax element on it plus penalties and interest (which equate to the principal in any case). The onus is on the tax payer (or non-payer) to prove that his income is legitimate and mitigate his tax burden by demonstrating true levels of profit. This needs the expert and independent approach of a forensic accountant.

Confiscation, tax evasion/avoidance and money laundering are increasingly forming the bulk of work for those forensic accountants who specialise in fraud. It is just as well as the crimes, civil confiscations and indeed defence of inappropriate allegations of tax avoidance are all linked by similar Anti Money Laundering legislation and guidelines that the authorities are wheeling out regularly in their attempt to beat the big time fraudsters.

The trouble is that in practice often it is the case that the big career criminals have made adequate provision for their wealth and they protect themselves with their money. The authorities appear to be throwing the book at the smaller criminals and misguided or accidental transgressors while the organised criminals are smiling all the way to their offshore banks!

This state of affairs is worrying and one in which the forensic accountant can assist. So long as a client’s funds are not frozen or public funding for defendants is still available, the fraud specialists are able to mitigate the authorities’ approach in cases where they may be inappropriate or somewhat heavy handed. 

It is possible to challenge estimates of profit and business valuations carried out by HMRC as well as identifying the appropriate accounting treatment to adopt in relation to contentious areas of expenditure and provisions.