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Forensic Accounting In Tax Evasion Cases

As a forensic accountant I am seeing an increasing number of tax evasion cases in my portfolio of work. The ultimate result in such cases has to be a fair settlement of any unpaid tax, and this normally means a reduction, sometimes substantial, in the amount originally demanded by HMRC.

My firm specialises in fraud and financial crime cases and therefore I naturally see a lot of criminal matters rather than civil tax settlements. Therefore the desired outcome for all my cases is not only a strong argument that less tax, if any, is due, but that the criminal indictments are not merited. Of course if I can show that very little or no tax is due, the criminal indictments have a good chance of falling away anyway.

A good example of this is a recently settled case where a criminal case was brought against a tax payer who was assessed by HMRC to owe over £1 million excluding penalties and interest. This included income tax assessed over a period of ten years together with tax on a number of capital gains arising from the sale of several properties during the same period.

As expected the routine forensic accounting work involved a detail examination of the Crown’s tax calculations – referring to explanations from the defendant, bank statements and other accounting records. This was a satisfying exercise, as the record showed the non taxable nature of most of the income. Furthermore, examination of property files, rental agreements and local authority council tax records indicated that four of the five property sales resulted in minimal capital gains once rental and private residence reliefs had been taken into account.

The remaining one property was more of a problem. It had been purchased, decorated over a period of a couple of weeks and then rented to the taxpayer’s family. The property was then sold a couple of years later at a substantial profit. The taxpayer maintained that he had stayed in this house during the period of decorating at which time it was his only and main residence.

Tax legislation is silent on the actual length of time a person has to live in a property for it to be counted as his principal private residence. However HMRC’s operating guidelines are much more pragmatic. After some argument, it was clear that there was some residency, albeit brief. The judge criticised the Crown for attempting to enforce civil codes in a criminal court and dropped the charges. This was of course a brilliant outcome, but did not stop HMRC from subsequently demanding capital gains tax on the single property!

In previous posts I have voiced the opinion that an independent forensic accountant like myself has a role to play as an “auditor” of public sector financial regulators. This tax case is an example of this. The police, HMRC, Insolvency Service, FCA etc. are all bodies that I have worked with over the years – and very frequently also find myself facing as defence expert.

Independent Forensic Accountants Working With The Regulatory Bodies

There are three main reasons why I am appointed by a regulator to undertake some forensic accounting work:

  • To examine a case to see if it makes sense and if the evidence supports the allegations
  • To respond at the last minute to a an expert report produced by the defence
  • To provide routine inputs during a case as an extension to the regulators’ existing resources

These reasons will be examined in more detail in a separate article. Whatever the reason, I feel that the input of an independent expert accountant is valuable to the financial regulators. It is assumed that the only reason there isn’t more collaboration between public sector regulators and private sector experts is the cost, being an additional expense to normal operating budgets. However, my impression, after more than twenty years in this business, is that the additional costs are far outweighed by the results obtained. I tried to carry out a very broad brush calculation of the additional cost to the public purse between the actual outcome of the case described in this article and the hypothetical cost of HMRC utilising an independent expert to review its investigation results and continue with a civil demand for unpaid capital gains tax on a single property. I stopped trying when I realised how many areas of savings there would be – I had reached about £75,000 potential savings of our hard earned tax money at that point!

I have long argued for more colaboration between independent forensic accountants and the regulatory authorities – there is often talk but never enough action. I could write a book about the positive coversations I have had with police investigators but know that in the end, spending outside the budget on outside resources will always be limited.