4 Penalties and criminal investigations
23. When the Department detects people operating
in the hidden economy, it can charge interest for late payment
and impose a civil penalty of up to 100% of the tax owed. The
Department can reduce the penalty where the offence is not serious
and where the person makes a complete and voluntary disclosure
of the amount owed and cooperates with the Department's enquiries.
It may also decide not to charge interest or impose a penalty
where only a small amount of tax is involved or the person does
not have the funds to pay a penalty.[26]
24. The Department rarely uses penalties available
to their full extent. In 2006-07, it imposed penalties totalling
3% of the total tax identified of £161 million. The Department
also charged interest of around 3% of the total tax identified.
It appears that in over half of the cases the Department imposed
no sanction.[27]
25. As a result of the Department's Review of Powers,
Deterrents and Safeguards, a new penalty regime is being introduced
through the Finance Act 2008. For tax periods from April 2008,
penalties will be based on the amount of tax understated, the
nature of behaviour that gives rise to the understatement and
the extent of disclosure by the taxpayer. Where people have made
genuine errors and taken reasonable care, the Department will
not levy a penalty. In cases where people have not taken reasonable
care, the Department will impose a penalty of up to 30% of the
amount of tax owed. Where people have deliberately evaded tax,
the Department will impose a penalty of up to 70% Where people
have deliberately evaded tax and concealed their income, the Department
will impose a penalty of up to 100%.[28]
26. The Department considers criminal investigation
of hidden economy cases with a view to prosecution, where it believes
the tax involved exceeds £10,000 and the case has other features,
such as being a second offence or involving a professional person
who advises on tax matters. The number of hidden economy prosecutions
has increased but there remains very little chance of someone
in the hidden economy being prosecuted. In 2006-07, there were
69 prosecutions, equivalent to two cases prosecuted for every
thousand cases detected. In contrast, the Department for Work
and Pensions secures 60 prosecutions per thousand cases for benefit
fraud. In recent years the Department has deployed most of its
2,000 criminal investigation staff on VAT missing trader fraud
because of the large amounts of revenue involved. Around 50 investigation
staff have tackled hidden economy cases. The Department now plans
to devote more resources to hidden economy cases, focusing on
more complex cases.[29]
27. The Department abandoned 284 criminal investigation
cases in 2006-07, roughly the same as the number of cases it opened
that year. The Department abandons cases if:
- there is either insufficient evidence to refer
the case for prosecution;
- there is little tax at risk; or
- further investigation of the case would not be
in the public interest.
Overall the turnover in completing cases appears
to be slowing down. The Department expects hidden economy criminal
investigations to be completed within one year but over a third
of cases have been open for longer, and 8% for over two years
(Figure 3).[30]
28. In 2006-07 the average cost of a prosecution
was £30,000, exceeding the average amount of tax detected
of £11,260. The Department estimated that the average cost
was around three times more than the cost of benefit fraud prosecutions
which it considered to be generally more straightforward as it
is easier to establish the amount defrauded.[31]
Figure 3: Criminal Investigations and prosecutions
in 2006-07
Source: C&AG's Report, HM Revenue & Customs:
Tackling the Hidden Economy (HC 341, Session 2007-08)
29. Obtaining widespread publicity of successful
prosecutions is important for successful prosecutions; more people
will be deterred from joining the hidden economy. While the Department
obtains regional media coverage, it has found it difficult to
generate national media coverage. It recognised the need to do
more to increase the deterrent effect.[32]
26 Q14; C&AG's Report, para 4.2 Back
27
Q14; C&AG's Report, para 4.3 Back
28
Qq 14, 91 Back
29
Qq 16, 27, 68, 85, 93; C&AG's Report, para 4.9 Back
30
C&AG's Report, paras 4.11 and 4.12 Back
31
Qq 15, 63-64; C&AG's Report, para 4.10 Back
32
Qq 15, 114; C&AG's Report, para 4.10 Back
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