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December 2019 Tax Investigation Round Up

December's round up of the latest tax investigation news and cases:

  • HMRC targets tax evasion committed by associated persons
  • IT contractor wins £240k IR35 appeal
  • History’s four most famous tax evaders

HMRC targets tax evasion committed by associated persons

HMRC has expressed significant concern over companies that commit VAT fraud within supply chains when supplying labourers. Calling for an increase in due diligence, HMRC officers plan to visit premises unannounced and carry out inspections of business records on the spot. This is in line with the Criminal Finances Act 2017 and investigations are currently taking place, yet no prosecutions have arisen since its inception.

The Act states that in the event that a corporate body or partnership fails to prevent its employees or associated persons (including agents and service providers) from facilitating tax evasion, it could be held criminally liable. This takes the form of two offences: failure to prevent facilitation of UK tax evasion and foreign tax, respectively. Whilst the first is investigated by HMRC, the second is handled by the Serious Fraud Office. Put simply, unless a corporate body can prove that it put in place reasonable preventative procedures, it will be held accountable.

The ramifications of these offences are significant. Upon conviction, unlimited fines can take effect, combined with reputational and regulatory damage to the business being highly likely.

HMRC recently published results from its research into corporate behaviour following the introduction of the Criminal Finances Act 2017. Its main aim was to uncover whether companies were aware of the new offences, as well as to what extent behaviours had changed as a result. The research showed that only one in four companies knew about the Act and had made changes to how they operate. Meanwhile, one-third believed that the Act was relevant to their own business, regardless of whether or not this was the case. The disappointing results of this research, which were released in March 2019, motivated HMRC to make the Act a priority.

In order to ensure that your business is compliant, reasonable preventative procedures should include six principles outlined by HMRC: risk assessment in regards to potential tax evasion by any associated person; proportionality that proves the business has carried out suitable actions; commitment from top-level management, not simply the finance department; a risk-based approach to due diligence, identifying and responding to present or potential risks; extensive communication of preventative policies to all staff; and the ongoing monitoring and reviewing of the preventative procedures to ensure effective development where required.

IT contractor wins £240k IR35 appeal

A First Tier Tribunal (FTT) was found in favour of an IT contractor following HMRC’s challenging of its off-payroll rules. This had involved the disputing of claims for over £240,000 of income tax and National Insurance contributions, stating that the IR35 intermediary legislation did not apply.

The IT contractor in question was RALC Consulting Ltd, owned by Richard Alcock. During the tax years 2010 to 2015, RALC had contracted with Accenture and the Department for Work and Pensions for work on the development of the universal credit system. The above demands were made by HMRC to RALC, stating that Alcock had been employed during this period and that the contracts were contracts of service for him personally, rather than contracts for service delivered to RALC.

Alcock argued that he was self-employed during this time, which the FTT agreed with due to the contract stating no explicit obligation to provide a minimum amount of work or a specific numbers of working hours or days. Meanwhile, it was agreed that the laptop provided to Alcock by the DWP did not constitute employment and was in fact a security requirement.

DWP also stated that though project milestones were required, Alcock had the freedom to work hours and days of his choosing and was given no notice period. During the delivery of the project, Alcock also provided services to other RALC clients. Upon completion, Alcock billed for the work in the manner that had been agreed.

This combination of circumstances satisfied the FTT that Alcock had been working as self-employed throughout the project, also dismissing HMRC’s secondary issue alleging that RALC’s accountant had been careless in submitting tax information.

History’s four most famous tax evaders

Whilst tax avoidance is the minimising of the amount of tax owed through legal means, tax evasion is a very different story. When an individual or company evades tax, it is committing an illegal practice. With this in mind, here are the four most famous tax evaders of all time, ranging from a Hollywood celebrity to a notorious gangster.

The star of the popular Blade franchise, when Wesley Snipes was accused of tax fraud in 2008 he stayed true to his movie character and refused to give in without a fight. Claiming that the IRS was incorrect, putting the blame on his advisers and even saying that he was a non-resident alien, he pulled out all the stops in an attempt to prevent the enormous fines. However, the result was a sentence of three years in prison and a debt of $23.5 million. This hasn’t stopped him from acting though, as you can see him in Coming 2 America, which will be released next year.

Leona Helmsley was a well-known businesswoman and hotelier, whose tyrannical behaviour earned her the nickname “Queen of Mean”. She too refused to pay taxes, despite her net worth topping one billion dollars. Billing millions in personal expenses to her business, she was taken to trial and received a prison sentence of sixteen years, although she actually only served nineteen months and was released in January 1994. Three years later, upon the death of her husband Harry Helmsley, she was left a vast fortune and multiple high-calibre properties, one of them being the Empire State Building.

Infamous mobster and unscrupulous businessman Al Capone is also famous for his commitment to tax evasion, which despite a long and varied history of crime was the only thing the police were able to prove. This was because the 16th amendment of 1916 stated that tax was required even on illegal income, which put Capone in a catch-22 situation (file his taxes and show that he’d broken the law, or break the law regardless through evasion). All in all, it was an ingenious move by the police and resulted in the gangster, who had been dubbed by the newspapers as Public Enemy No. 1, serving eleven years in prison.

Celebrated country music performer Willie Nelson may be a liberal activist, but that doesn’t mean he can get away with owing $16.7 million in tax back in the 1990s. However, being highly creative, Nelson released an album in 1992 called The IRS Tapes: Who’ll Buy My Memories? All profits went to the IRS, which along with the auctioning of his assets paid the substantial bill in its entirety. As of 2019, he is worth $25 million and continues to release bestselling albums.

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