HM Treasury has announced the introduction of a new reward scheme designed to encourage informants to come forward to HMRC about tax fraud. This initiative is inspired by the whistleblower models in the US and Canada, and is part of the Government's broader strategy of enhancing tax compliance and preventing tax avoidance.
Closing the tax gap
This announcement comes in the wake of the Chancellor's Autumn Budget, which underscored the Government's commitment to closing the tax gap.
The "tax gap" is the difference between the amount of tax owed and the amount of tax collected. In the latest published data (for 2022/23), the tax gap was estimated to be 4.8% of total theoretical tax liabilities, or £39.8bn in absolute terms.
The Autumn Budget unveiled an ambitious package of measures to close the tax gap (read our article discussing this). The new whistleblowing scheme is yet another measure being introduced by the Government to reduce the size of the tax gap and collect more of the tax that is due.
What incentives for informants are already in place?
The new scheme will supplement the existing rewards scheme for those who report tax non-compliance to HMRC. Currently, HMRC have the discretion to pay rewards to informants. However, the amount paid is relatively limited, with it being reported that HMRC paid out just £978,256 to informants in 2023/24. The amount of the award is not linked to the amount of additional tax collected, and the payment scheme is not particularly publicised by HMRC.
The introduction of this scheme addresses a concern that the lack of publicity surrounding these payments, as well as their modest size, means that there has been insufficient motivation for would-be informants to come forward.
What will the scheme look like?
The new scheme will look to target serious non-compliance by large corporates and wealthy individuals, with a particular focus on offshore avoidance and the use of tax avoidance schemes.
Further details about the new scheme will be announced later this year, but it will broadly adopt the more generous, and well-established, approach to rewards for whistleblowers used in the US and in Canada.
The US Internal Revenue Service (IRS) will pay informants of tax non-compliance an award of 15-30% of the additional tax collected (subject to the information provided meeting certain criteria). This meant that in the fiscal period 1 October 2022 to 30 September 2023, the IRS paid whistleblowers 121 awards totalling $88.8m (which was attributable to information that resulted in proceeds collected of $338m). They received a total of 6,455 submissions from whistleblowers.
The Canadian Revenue Agency (CRA) gives financial rewards to individuals who provide information to the CRA about major incidents of international tax non-compliance. To be eligible for an award, the tax collected must be CAD$100,000 or more, and the awards range between 5% and 15% of the additional tax collected.
The new HMRC scheme will similarly provide for rewards of a certain percentage of the additional tax collected to be paid to informants (likely in the region of 5-30%). Given the amounts of tax that might be involved, this could result in life-changing amounts of money paid to informants and will act as a strong incentive for potential informants to come forward.
Given that the scheme intends to target "serious" non-compliance, there is also likely to be a minimum threshold of additional tax that needs to be collected before the reward scheme will apply.
We are also likely to see provisions introduced to protect those who do provide information to HMRC. For example, the CRA has strict confidentiality policies in place to protect the identity of informants, and the IRS has codified protections for whistleblowers against retaliation.
It is also worth noting that, given the focus on large corporates and wealthy individuals, it is likely that the informants may be employed by the entity or individual they are reporting. Employers may use non-disclosure agreements to stop their employees from sharing information about their tax compliance position. However, by law, having a non-disclosure agreement in place cannot stop someone from whistleblowing, and so confidentiality agreements will not prevent informants reporting tax non-compliance to HMRC.
The trend towards incentivising whistleblowers
Whilst the Serious Fraud Office (SFO) has been vocal about its desire to incentivise whistleblowers, particularly since Nick Ephgrave QPM took over as Director of the SFO in September 2023, it is HMRC who have acted first with the introduction of this scheme. The SFO has highlighted what it sees as the benefits of incentivising whistleblowers with reference to the US model and has been clear in its desire to introduce a similar scheme in the UK.
The introduction of this scheme by HMRC may provide the SFO with further impetus to push for an equivalent scheme in the corporate crime sphere.
Conclusion
The introduction of this scheme is indicative of a more commercial approach being taken by the Government to closing the tax gap, as well as a change in mind-set as to how HMRC targets and pursues non-compliance by large corporates and the wealthy. Whilst there will be a cost to HMRC to reward informants, the tax-geared approach should mean that there will be a net gain to the Exchequer in respect of issues that would not otherwise have come to light. As well as furthering the Government's aim of reducing the tax gap, the measure will also be intended to promote a culture of transparency and accountability in the fight against tax avoidance.
Of course, the incentives provided by such a scheme could have other consequences. HMRC will likely need to allocate further resources to vetting reports that are made in order to identify those that disclose a genuine issue. Businesses may be required to spend a lot more time addressing allegations, even if they are ultimately unfounded. It could even result in a shift – positive or negative – in the relationship between businesses and wealthy individuals on the one side and those closest to them on the other. Either way, it increases the pressure on them to ensure that they are ready to address questions about the structures that they have implemented and how they address their tax position.
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