If HMRC suspects irregularities in your tax position, then it is absolutely correct that it is preferable to be under investigation by HMRC's civil investigators rather than their criminal counterparts. Whilst a civil investigation can result in considerable financial penalties for non-compliant taxpayers, those subject to such investigations will not be arrested or face criminal conviction so long as it stays civil. That being said, a taxpayer must approach a civil investigation with caution, as there are no guarantees that the file will not make its way into the hands of a criminal investigator in certain circumstances.
Why could the civil investigation turn criminal?
There are many reasons why a civil tax investigation might turn into a criminal investigation. These can be broadly divided into evidence-based reasons and conduct-based reasons.
Evidence-based reasons
If during the course of a civil investigation, for example one conducted under section 9A of the Taxes Management Act 1970, Code of Practice 8 (COP 8) or Code of Practice 9 (COP 9) (where the Contractual Disclosure Facility has been rejected), evidence comes to light showing that a criminal offence may have been committed, the investigation will likely be passed to criminal investigators for review. If the outcome of the review is that HMRC suspect fraud, a criminal investigation may be initiated, however HMRC may instead invite you to enter into the Contractual Disclosure Facility under COP 9. COP 9 provides a taxpayer the opportunity to admit to "dishonest behaviour that led to or was intended to lead to a risk of loss of tax" which would include "lying to HMRC about facts relevant to the assessment and collection of tax (including concealing or withholding relevant facts or failing to disclose a liability), dishonestly and deliberately claiming repayments or reliefs to which one is not eligible, or dishonestly and deliberately paying less tax than is properly owed" and allowing them to regularise their tax position and any additional tax due. In exchange for "a complete, accurate, open and honest disclosure of all deliberate behaviour and all other irregularities in their tax affairs" HMRC commits under COP 9 "not to open a criminal investigation" thereby keeping it within the civil sphere.
Conduct-based reasons
If during a civil investigation HMRC discover that a taxpayer has sought to mislead investigators, be that through the making of false statements, the provision of false documents or the destruction, disposal or concealment of evidence, it is likely that a criminal investigation will be commenced. Whilst there are many offences specific to taxpayer's conduct in particular circumstances, only those most commonly arising are set out below.
If a taxpayer intentionally makes a false statement to HMRC during an investigation the Revenue is likely to take the view that they have committed a criminal offence. Taxpayers who have intentionally made false statements to HMRC have found themselves being charged with fraud by false representation (sections 1 & 2 of the Fraud Act 2006). Whereby a taxpayer has dishonestly made a false representation to HMRC (one that is untrue or misleading and which the taxpayer knows is, or might be, untrue or misleading) to make a gain for themselves or another, or cause HMRC a loss or expose HMRC to a risk of loss (i.e. reduced their tax liability), the offence will be made out. Depending on the value of the fraud (the loss of tax that the representation was intended to bring about) and the circumstances of both the offence and the taxpayer themselves (e.g. similar previous convictions, attempts to conceal or destroy evidence, previous good character etc.) a custodial sentence may be imposed upon conviction.
Similar to the making of a false representation, the provision of false documents to HMRC during the course of a civil investigation may result in the investigation being passed to criminal investigators. Providing false documents may be regarded as a false representation and again, as with the making of false statements, give cause for HMRC to investigate a taxpayer for fraud. A further offence of forgery may also result from the very act of fabricating documents, under Section 1 of the Forgery and Counterfeiting Act 1981. Where a taxpayer makes a false instrument (i.e. a document) for the purpose of inducing HMRC to accept it as genuine, and by reason of accepting it conclude an investigation in favour of the taxpayer, a forgery offence is made out. Taking into account such considerations as "the role of the offender in the operation, its scale and the sophistication of its products, the type of false documents being manufactured, the damage caused in terms of the distribution of false documents and the income generated" a court may impose a custodial sentence.
In the course of a civil investigation, it is not uncommon for HMRC to seek to exercise their information and inspection powers, which includes the issuing of information requests in accordance with their powers under Schedule 36 to the Finance Act 2008 Paragraphs 53 and 54 of Schedule 36 create an offence of concealing, destroying, or otherwise disposing of, or arrange for the concealment, destruction or disposal of any document that a person is required to produce by an information notice or in relation to which a person has been informed by an officer of HMRC in writing that the document is, or is likely to be the subject of an information notice addressed to them (an informal information request). It follows therefore any attempt to destroy or conceal information from HMRC following receipt of either a formal or informal information notice will constitute an offence, any suspicion of such will likely cause HMRC to initiate a criminal investigation.
In summary, should evidence emerge during a civil investigation that a taxpayer has committed a criminal offence, it is likely that HMRC will commence a criminal investigation or otherwise offer them the opportunity to enter into the Contractual Disclosure Facility under COP 9. Equally, should HMRC discover that a taxpayer has told any lie or has submitted any false document during the civil investigation or has concealed, destroyed or disposed any document, or arranged the same, that is subject to either a formal or informal information request, it is probably that a criminal investigation will be opened.
Will I be told that I am being criminally investigated?
It may be some time before you are made aware of any criminal investigation. It is likely that the first you will hear of it will be a letter inviting you to an interview under caution at the police station, or worst-case scenario, HMRC knocking on your door with a warrant for your arrest and to search your premises. The optimum time to take advice is when you first suspect that HMRC may be investigating you for fraud. This will not always be clear, but you may be able to identify this from correspondence, or a sudden and prolonged pausing of communication. In such circumstances, it is vital to obtain specialist legal advice and representation to protect your position and maximise the chances of a positive outcome.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
