Failure to comply with the law can result in significant penalties for both individuals and companies in the UK. It is important to understand what tax evasion entails to ensure you you stay on the right side of the law.
Understanding Tax Evasion
- What are tax evasion and tax avoidance?
- Businesses may now be criminally liable
- What's the maximum tax evasion penalty in the UK?
- Notable UK tax evasion cases
- Famous US tax evasion cases
What are tax evasion and tax avoidance?
Tax evasion occurs when a person or company escapes paying taxes by concealing the true state of their affairs to tax authorities. It covers evasion of income tax or VAT, excise duty and custom duty frauds. On the other hand, tax avoidance is where a person or company legally exploits the tax system to reduce tax liabilities, such as establishing an offshore company.
Businesses may now be criminally liable
Under the Criminal Finances Act 2017, which came into force on 30 September 2017, businesses are now criminally liable if an employee or an associated person (an agent or another third party) facilitates tax evasion whilst providing services on their behalf.
The Act, built on the existing Bribery Act 2010, already deems it a criminal offence for individuals or businesses to evade tax. Yet, the Act made it hard for the authorities to prove a business had been complicit in tax evasion, and the new legislation gets over this problem.
Failure to comply with this new law can result in significant financial penalties and even prison time, not to mention serious reputational damage. This means businesses need to take responsibility and have procedures to protect themselves. If one of your employees or a third party individual (e.g. a consultant) evades tax, you need to be able to prove that you had reasonable prevention procedures in place.
What's the maximum tax evasion penalty in the UK?
Violating the Criminal Finances Act 2017 can have crippling consequences for an organisation. The penalty for tax evasion can be anything up to 200% of the tax due and may even result in jail time. For example, income tax evasion can result in 6 months in prison or a fine of up to £5 000, with a maximum of seven years or an unlimited fine. Evasion of VAT carries similar punishment, though it could result in a £20 000 fine.
Notable UK tax evasion cases
HMRC’s fraud investigations led to over 600 individuals being convicted for their part in tax crimes in a single year. Their Fraud Investigation Service brings in £5 billion a year through civil and criminal investigations.
Clearly, some individuals will go to great lengths to abuse the system and not pay their taxes. But the convictions show just how serious the HMRC is taking tax evasion. Prison sentences are getting longer too, and this is likely to continue.
The examples below have a notable trend: tax evasion often occurs with other crimes such as smuggling and money laundering.
1. Fraudulent investment claims
Antony Blakey and John Banyard, directors at Ethical Trading and Marketing, who attempted to steal more than £60m through a fraudulent tax avoidance scheme claiming to invest in HIV research and conservation, were jailed for 14 and a half years.
2. VAT avoidance
A Berkshire-based gang selling illicit alcohol were jailed for more than 46 years. Evidence showed that they stole £34m in VAT and laundered £87m through more than 50 bank accounts in Britain, Cyprus, Hong Kong, Dubai and other foreign countries.
3. Avoid tobacco taxes
Robert Zduniak was part of an organised gang that processed smuggled raw tobacco in illegal factories. He was tracked down to a Prague hideaway and brought back to the UK to serve an 8-year sentence for his part in a £17m tax fraud.
4. Avoiding fuel taxes
Five people were jailed for 16 years after distributing and selling an estimated 4.8 m litres of illegally mixed kerosene and diesel to unsuspecting motorists, including haulage companies across the South East.
5. Fraudulently reclaimed VAT
A father and son pair were convicted for claiming £1m in VAT repayments after they lied about spending £14 million on building new properties. Stephen Howard, a former Top Gear mechanic, was jailed for helping them flee the UK to Spain.
6. Fake investments
Five tax fraudsters who devised a fake eco-investment scheme as a tax break for wealthy investors were jailed for 43 years. They were also ordered to repay £20m or face another 39 years behind bars and still owe the money.
7. Avoiding tobacco taxes
Dhanji Varsani claimed to be unemployed while driving high-powered vehicles, playing at top golf courses and enjoying holidays in places like Dubai. He was jailed for nearly 4 years for smuggling almost 7 tonnes of hand-rolling tobacco and failing to pay the £1.2m owed in excise duty.
8. VAT fraud
Fictitious transport firm boss Lee Hickinbottom conspired with his former partner to submit fraudulent VAT repayment claims to HM Revenue and Customs (HMRC) between 2014 and 2017. Hickinbottom was convicted of stealing £1.3m in tax-payers' money. Spending included buying property in cash, home improvements and more than £1 500 in Lego.
9. Gift aid tax fraud
Dale Hicks, the voluntary treasurer of a charity for an ex-offenders charity (yes, you did read that correctly!), was jailed for 3 years. He had tried to steal more than £330 000 in a Gift Aid repayment fraud to fund a lavish holiday, including a £25 000 cruise.
Famous US tax evasion cases
a. Walter Anderson
Walter Anderson's case is the biggest tax evasion case in U.S history. The telecommunications entrepreneur was convicted for hiding his earnings through aliases, offshore bank accounts, and shell companies. While on trial in 2006, Anderson admitted to hiding approximately $365 million worth of income. He was sentenced to nine years in prison and issued a fine of almost $400 million in back taxes, fees and penalties.
b. Al Capone
Prosecutors worked for years to build a case against notorious crime boss Alfonse “Scarface” Capone. Eventually, the only thing they could get him on was tax evasion, and in 1931 Capone was sentenced to eleven years in prison and fined $80,000. Capone only served seven years in prison, but it worked to scare other people off not paying their taxes. More than $1 million in unpaid taxes were submitted the year after his conviction.
c. Leona Helmsley
Hotel operator Leona Helmsley and her husband were accused of billing millions of dollars in personal expenses to their business to escape taxes.
Helmsley dubbed the 'Queen of Mean', was famously quoted as saying, "We don't pay taxes. Only the little people pay taxes." She was convicted on three counts of tax evasion and served 18 months in prison.
Want to learn more about Financial Crime?
To help you plan and execute compliance in your organisation, we have created a comprehensive anti-money laundry and counter-terrorist financing roadmap.
We also have 80+ free compliance training aids, including assessments, best practice guides, checklists, desk aids, eBooks, games, posters, training presentations and even e-learning modules!
If you'd like to stay up to date with financial crime best practices, industry insights and key trends across regulatory compliance, digital learning, EdTech and RegTech news, subscribe to the Skillcast Compliance Bulletin.
Last but not least, you can interact in person with thought leaders and your peers at one of our popular live webinars and face-to-face events.
If you've any questions or concerns about compliance or e-learning, please get in touch.
We're happy to help!