2 Increasing the tax collected through
civil investigations
6. Each year, local caseworkers refer
some 4,000 cases of
suspected serious evasion for possible investigation by specialised
teams. Between 2007-08 and 2009-10, the number of referrals fell
from an average of 380 a month to 330 a month, but the Department
told us the number of referrals had since recovered. Although
mandatory, the centralised referral system has not been used consistently
across the Department, and some caseworkers are disillusioned
by the low rate at which their referrals are taken up by specialist
investigators. In 2008-09, just 20% of referrals were adopted
by investigation teams, with the remainder returned to the originating
officer to pursue.[13]
7. The Department has not analysed the reasons for
rejection which would help it judge the quality of referrals and
whether it was focusing specialist resources appropriately. Nor
does it know the result of those cases that are returned to the
originating officer. The Department acknowledged, however, that
resources have restricted the number of specialised investigations
undertaken and told us that it expects to expand the number of
investigators so as to take on more cases in future.[14]
8. The Department said that it had always intended
there to be a high number of referrals through the system in its
early years, even though this inevitably meant many cases would
not be taken up. It said that this was an important way of gathering
intelligence.[15] However,
following a review, it now plans to re-launch the referrals system
in April 2011 with more specific criteria for the types of case
that warrant civil or criminal investigation. In future, it will
seek to target referrals more carefully to increase their chances
of adoption for specialised investigation.[16]
9. In 2009-10 the Department concluded 265 civil
investigations of fraud, generating £115 million of tax.
It uses this type of investigation for suspected cases of serious
fraud, where it does not propose a criminal investigation. The
average time taken to complete a case was 25 months, compared
to an internal target of 18 months. 75% of cases exceeded this
target and 15% took over three years (Figure 2). Specialist Investigations
also concluded additional cases that were started under the previous
regime for civil investigation of fraud which was replaced in
2005. The 23 cases took on average 6 years to complete.[17]
10. There were also wide variations in the time
taken at different stages of the investigation:
- in only 10% of cases was the
initial decision to proceed on a case made within the target time
of 10 days, while 13% took over 100 days; and
- in 77% of cases it took longer than the 180
days' target to obtain the taxpayer's disclosure report; 8% took
over a year.[18]Figure
2 Time taken to complete civil investigations of fraud settled
in 2009-10
Note: Based on data for 265 civil investigations
of fraud cases settled in 2009-10
Source: C&AG's Report Figure 7
11. The Department considers that the complexity
of a case often affects the time required to bring it to a conclusion.
Some cases are straightforward, for example hiding the interest
earned on money held offshore whereas others might, for example,
involve a complex network of offshore companies. Nonetheless,
it intends to improve the speed and efficiency of investigations
in future, so as to increase the number of cases and bring in
more revenue. It considers the National Audit Office estimate
of potential additional revenue of £30 million - £60
million to be the upper limit of what will be possible though,
because during the downtime on cases investigators already work
on others. The Department does not have sufficient management
information to produce a firmer estimate at present. This analysis
should become possible once the new case management system becomes
operational in 2011.[19]
12. Civil investigations lead to the imposition of
financial penalties up to a maximum of 100% of the tax understated.
Penalties can be reduced depending on the seriousness of the taxpayer's
initial omissions and their level of cooperation with the investigation.
The Department has not analysed the level of penalties applied
across civil investigations. On
civil investigations of fraud completed in 2009-10, however:
- the average penalty was 21%
of the tax due;
- over a quarter of penalties were for less than
10% and most were for less than 30%; and
- 14% of cases attracted no penalty at all.[20]
13. Following a review of the Department's powers,
a new penalty regime is now in force for tax returns relating
to 2008-09 onwards. The new regime sets tougher minimum penalty
rates for deliberate error. Different types of behaviour now attract
different levels of minimum and maximum penalty. Penalties are
also higher if the taxpayer's disclosures are prompted by the
Department's scrutiny. For example, for a prompted disclosure
of deliberate evasion with concealment, the minimum penalty is
50% and the maximum 100%. In cases of simple errors and carelessness
the penalty is 0% to 30%. Because of the time it takes for the
Department to receive and review returns, it has so far applied
very few penalties under this new regime.
[21]
14. It is good practice to ensure that tax and penalties
are recovered promptly, but the Department does not routinely
monitor whether tax and penalties due from civil investigations
have been collected.[22]
A bespoke analysis revealed
that it could not trace payments for 27%
of the outstanding tax due on completed civil investigations of
fraud from 2008-09. Of the £58 million that could be traced,
only 84% had been collected.[23]
15. Currently there is no automatic link between
the Department's case management and debt management systems.
It considers, on the basis of sampling, that 90% of debts are
collected, and cautions that not all debts can be collected because
of bankruptcies and defaults.[24]
The Department encourages investigators to obtain upfront payments
in settling cases. It is planning to join up its systems in 2012,
and also to conduct a specific campaign on compliance debts, with
the aim of increasing the level of recovery to 95%.[25]
13 Q 49; C&AG's Report paras 2.5 and 2.6 Back
14
Qq 8, 86-87; C&AG's Report para 8 Back
15
Q 49 Back
16
Qq 50-51, 57-60 Back
17
C&AG's Report paras 3.3-3.5 Back
18
Q70, C&AG's Report para 3.6 Back
19
Qq 70-74 Back
20
Q 41-42; C&AG's Report paras 4.3, 4.6 and Figure 9 Back
21
Qq 41-44; HMRC 08/10 Compliance checks - penalties for errors
in returns or documents Back
22
Qq 26-27 Back
23
C&AG's Report para 4.13-4.14 Back
24
Qq 23-25 Back
25
Qq 27-33, 45 Back
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