Investigating tax fraud

In the UK it is Her Majesty’s Revenue and Customs that investigates tax fraud as part of its regulatory duties. HMRC is a massive organisation that has grown out of the merger of what was termed “the Inland Revenue” and “Customs and Excise”. HMRC is responsible for the overseeing of all forms of tax within the UK including Value Added Tax, Import Duties, Income Tax and Corporation Tax to mention a few.

I think it would be fair to say that millions of offshore companies do not pay tax at all in the UK, or in the USA or in any country for that matter! I read somewhere that a third of companies in the UK do not pay any tax at all and another snippet presented by a leading firm of Chartered Accountants was that in 2006 some 54 billionaires residing in the UK paid their tax at a rate of 0.14%, yet the poorest in our society paid over half their income to the Exchequer – not only in income tax but also the indirect taxes such as VAT and other stealth taxes!

I am willing to bet that most readers will not be asking “where on earth did he get this information from”. However, I will tell you that I have not sourced it properly yet but am willing to bet that it is true – and I think most people would accept the fact that corporate giants and rich individuals who can afford to be domiciled in different jurisdictions pay proportionately less tax than the poor.

However, though most of this imbalance is a result of clever manipulation of the complex tax law by highly paid tax advisors, a very large proprtion is not. It is tax fraud. It is no wonder that HMRC have such a difficult job when many think that withholding tax is not a crime but a business skill!

HMRC do not generally employ external fraud investigators or forensic accountants like me to assist with their enforcement of the UK tax system. However, because their approach is often ill conceived, dogged and bloody minded (possibly because of the scale of the problem they face) it is those on the receiving end that come to me as a forensic accountant for help! If somebody finds themselves wrongly accused of evading tax, it needs a forensic accountant to unpick the financial transactions and demonstrate true levels of income or profits to the satisfaction of HMRC.

A brief example of the problems HMRC can cause is a tax demand they issued regarding the profitability of a financial company a couple of years ago. They calculated that the business had made some £600,000 in profit over about 4 years and wanted about £150,000 in unpaid tax. The business had actually declared £50,000 profits and paid tax on this.

I examined the HMRC calculations and noticed that they had used two different methods to estimate profits. Fine, a very good idea, cover all the bases. The trouble is that they then added the two together, thereby double counting the profit. Then, I discovered 71 separate arithmetical errors in their calculations!

My own estimates gave, as often happens in a forensic investigation, a range of possible values for the profits. I reckoned that they would be between £25,000 and £75,000. It turned out that HMRC dropped their original claim and homed in on my higher value….

HMRC do have a hard job, but fraud investigation in my book needs to be precise and applied with experience, qualification and diligence. Often it is the private sector that has to police the public sector regulators to avoid miscarriage of justice.

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