HM Revenue & Customs: Managing civil tax investigations - Public Accounts Committee Contents


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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