The Spring Statement and the prosecution of tax evasion

Chancellors of the Exchequer often seek to bridge the gap between government expenditure and income by promising to recover more from those conducting tax evasion and/or tax avoidance. This year’s Spring Statement was only the latest iteration of this cycle. In this Keynote, Tax partner Martin O’Neill outlines the government’s plans for the prosecution of tax evasion.

In the October 2024 Budget, the Chancellor stated “…But when working people are paying taxes while struggling with the cost of living it cannot be right that others are still evading what they rightly owe in tax…”.  In her Spring Statement yesterday, the Chancellor went further, pledging HMRC investment in technology, in capacity to crackdown on tax avoidance and setting out plans to increase the number of prosecutions for tax evasion by 20% every year, meaning in real terms, 500-600 prosecution decisions every year.

Is this a realistic target?

In 2014/15 HMRC brought charges in over 1,100 cases of alleged tax fraud, and this figure fell to 749 by 2018/19. In 2020, that figure had fallen again to 181 (the Covid-19 pandemic may have impacted this). Since this low-point on the graph, HMRC’s performance in this regard has only marginally recovered, only rising to 340 in 2023/24. So, whereas on the face of it, a 20% planned rise sounds significant, it is calculated on a very low base and only takes the department to approximately 50% of its performance a decade ago. If HMRC’s newly reinvigorated enthusiasm for investigation is successful in the short term, there is clearly a lot of scope for further expansions of this discipline in the coming years.

There hasn’t been an official comment from HMRC explaining why prosecutions for tax fraud fell so dramatically, nor have we seen any plan for its subsequent expansion again. The industries/sectors that will be targeted first are also unknown. However, HMRC has a well-rehearsed approach to tax fraud prosecution, using the criminal courts to prosecute those persons conducting fraud, while at the same time using the civil courts, principally the Tax Tribunals, to recover taxes from any parties in supply chains above or below the alleged fraudsters using the Kittel/Mecsek criteria. These European authorities, now written into UK law, permit HMRC to recover taxes lost due to fraud from persons whose transactions can be shown to be connected (sometimes many companies distant down a long supply chain) to the fraudulent evasion of tax, and where the connected parties knew, or should have known, of this connection. Insolvency is no shelter from the Kittel/Mecsek attack as penalties imposed on limited companies following their receipt of these tax assessments are recoverable against directors’ personal assets in many cases. Historically HMRC has recovered substantial sums using the Kittel/Mecsek test, which conveys considerable subjective powers on HMRC Officers who will now be emboldened by the Treasury’s demands to increase recovery of taxes to bolster the struggling government finances.

Certain industries are perennially on the HMRC ‘hit list’. Companies trading in the supply of labour (to any industry, not just construction), trading in alcoholic drinks & tobacco, import/export, trading in soft drinks, toiletries and electronics goods should take advice on the latest supply verification procedures which are the only reliable method of avoiding the long arm of HMRC’s enforcements strategy.

If you have questions or concerns about any of the issues raised in this article, please contact Martin O’Neill.