Mark Jenner & Co Limited – 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.

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.

Support Publishing is a recognised term used for businesses that manage the publication of a range of items such as desk diaries, wall planners, pamphlets, magazines and books. The items will be used to promote a particular good cause. For example a diary might be prepared on behalf of a police sports foundation or a booklet might be published in support of child safety on crossings outside schools.

The intention is for the publication to be circulated to schools and community centres in such a way as to raise public awareness of the messages contained within, such as child safety, safety at work or the good work a charity might be doing.

Of course the publishing company needs to be paid for supplying the publication and there are two ways of doing this. The first is for the charity or good cause to approach the publisher and commission the required item. They may order and pay for several thousand desk diaries to circulate around potential donnors. Details of the charity and the work it is doing will be contained within the diary. This is no different from the marketing products that may be commissioned by commercial companies to raise awareness of their brands.

The second method for funding the publication is for the publisher to include commercial advertisements. An advertser may be happy to fund an entry in a good cause booklet knowing that the public will associate their name withe the good cause and in doing so raise the commercial awareness of their brand. In theory it would be a good method of marketing.

There is nothing futrther to mention concerning the first method of funding. However, the second method is wide open to abuse by con merchants who see this as an easy way to solicit money from the millions of gernerally small businesses around the country who find it very difficult to say “no” when asked to support a good cause locally while at the same time gaining valuable marketing exposure.

To illustrate the support publishing practice that has grown up in the UK over recent years consider the case of McPherson Publishing Limited and Cavendish Publishing Limited. The names have been changed but represent very real companies that were trading fraudulently.  These support publishing companies have been well reported in the press following what was apparently the greatest number of complaints to Trading Standards offices around the UK ever received for one business. They were the same business, one simply setting up and taking over when the regulatory heat became too much for the other. Both companies have now been closed down by the authorities. In fact there were other forerunner companies and there are currently subsequent companies still operating! All were managed by the same people and utilised the same staff out of the same offices.

The business produced quarterly magazines aimed at off duty police, ambulance and fire service personnel. The publication included a few articles of general interest, recipes and puzzles together with around 200 advertisements for local businesses. Each magazine was produced on a regional basis, with the same content but with paid advertisements from businesses in each region.

200 advertsiements through 50 regions, four times a year at an average cost of £250 per entry gives a potential annual revenue of £10,000,000! When you consider that each advertiser received a copy of the magazine and a few hundred were distributed between a dozen or so police stations and ambulance centres – only about 50,000 magazines were printed each year.

Each magazine cost around £2 to print and post out. This leaves most of the £10 million to pay the dozen or so telesales staff around 40% commission and the rest, the lions share, going to the directors running the company.

The business worked because the sales team were self employed on commission, and used various devious means to hook the clients, whose names were simply extracted from phone directories and local papers. Most people don’t like to say no when asked to support good causes, partcicularly if names of charitable causes are used as a hook. The first telephone call would spin the tale of widely distributed publications… “100,000s in your area” and thereby solicit a real commercial interest. The second call, often only minutes after the first would be recorded and would exclude any detail of the false promises. It would simply confirm some of the victim’s details. The customer was often left somewhat bemused, thinking that they would make a final decision when they received their advertsiement copy for approval. However, what they would receive was an invoice with the only option for cancelling being the payment of a charge!

A large proportion of small businesses will pay such an invoice not wishing to enter into any dispute. Those that knew their consumer rights a little better were more likley to bin the first payment demand or return it with a letter saying they did not wish to go ahead with the advertisement. But the support publisher has a plan for increasing the proportion of targets who pay from the initial 40% or so to around 60% or even 70% by a sequence of demanding letters and phone calls robust enought to shake the resolve of even the most resolute victim. In the illustration, the business even passed the unpaid bills over to another debt collecting business that it had set up itself to give the illusion of escalating seriousness in the matter. They even resorted to “door-stop” collection techniques and a video of the threatening behaviour of one particularly nasty instance was caught on the victim’s mobile phone and aired on BBC’s Watchdog in 2006!

That this is a fraud there is no doubt. However, it is a problem that is very hard to deal with. The methods used by the support publishers make it harder and harder to close them down, with sanctions being fairly lenient to date (director disqualification etc). It is likley that the Fraud Act 2006 could be a better route if it was possible to get the police economic crime units to take an interest. The trouble is they are very often unwittingly caught supporting these very cons themselves by agreeing to take nominal quantities of the publications which they simply see as being “freebies”.

The telesales opperators in the business pay no tax. When investigating this particular support publisher I had a whistleblower contact me to say that all the staff used aliases and most were drawing supplementary benefit as well as earning £30 £50,000 per year!

So we have tax fraud, benefit fraud, Misrepresentation Act offences, Telecomunications Act offences, Data Protection Act offences and Fraud Act offences (plus the Company Act 1985 offences that I was investigating).

I tried to arrange a meeting with senior tax representitives from HMRC to inform them of the scale of the tax evasion, not only in the few companies that I investigated but concerning the industry as a whole, but the feedback was that theyconsidered the problem one that they could not deal with. The message was that they would have to wait until legislation changed.

Eventually a High Court Order was obtained to close the companies down. When the Official Receiver went in to the business the next day he found that the bank accounts had been stripped. Within a few days the business was back up running under a different name from the same (rented) premises.

Support publishing is a recognised problem for the authorities who continue to close these companies down only to have them reopen later under different names. Some open as partnerships or sole traders, having cottoned on to the fact that Companies Investigations Branch will not investigate them then. The police are unlikley to have the time and therefore if the perpetrators can make sure the complaints to Trading Standards are kept to a minimum by not pursuing debts too rigorously they will continue for the forseeable future to keep trading below the radar!

By Mark Jenner, forensic accountant and fraud investigation expert. You can keep up to date with his investigator’s diary blog.