HMRC eyes prosecution powers in tax evasion clampdown
HMRC is expanding its criminal investigation powers as it comes under increasing pressure to recover lost revenues from tax evasion.
As part of Labour’s ‘Close the Tax Gap’ initiative, Rachel Reeves announced plans to raise over £1bn in additional gross tax revenue annually by 2029-30
The Chancellor singled out tax evaders in her Spring Statement.
The most recent estimate is that tax evasion cost £5.5bn in 2022–23, equivalent to around 0.7 per cent of all taxes owed, but as noted by a Public Accounts Committee (PAC) report, this figure could be “just the tip of the iceberg”.
However, the campaign against tax evasion by HMRC has intensified as it has become “increasingly proactive.”
Data reported last week revealed that HMRC conducted more dawn raids over the previous year, following 648 raids in 2023/24.
Over the 2023–24 period, the tax agency launched 430 new criminal investigations and more than 10,200 civil investigations into suspected fraud and charged around 17,000 penalties for deliberate non-compliance.
Gideon Sanitt, partner at law firm Macfarlanes, explained, “There has always been a lot of rhetoric about HMRC not targeting tax fraud strongly enough, but HMRC did not appear to have the same priority over criminal prosecutions.”
PAC noted HMRC had far fewer prosecutions for tax evasion compared to pre-pandemic levels
“However, new funding, commitments to close the tax gap, and more direct measures like the whistleblowing scheme may represent a real shift in how HMRC deals with fraud,” Sanitt added.
The tax agency informed the PAC that it has increased the size of its fraud investigation service from 4,400 people in 2018–19 to 4,800 and plans to further expand it to 5,400 by 2029–30.
The government body stated that it anticipates this will lead to an increase in the volume of its criminal investigations and subsequent prosecutions.
HMRC targeting supply chains
“HMRC is targeting businesses that have not taken responsibility for the actions of their suppliers,” says Debbie Jennings, VAT director at accountancy firm Moore Kingston Smith.
The Kittel principle, a European legal doctrine, grants HMRC extensive powers to combat perceived VAT fraud across supply chains.
“It is not possible to plead ignorance or turn a blind eye”. She explained that the tax agency only needs to demonstrate that the business knew or should have known that the supplier was involved in fraud.
“If firms don’t have robust due diligence processes, they may find themselves with expensive VAT bills. HMRC will deny the input tax claimed and also charge penalties.”
“In some circumstances, HMRC may even look to cancel your VAT registration and deny all input VAT recovery – including that incurred on entirely legitimate purchases,” Jennings added.