Lee Sharpe warns that HMRC is amassing several sanction powers which are more troubling than some may realise.
Traditionally, enquiry amendments and tax penalties are treated as civil cases; in other words, not only is HMRC supposed to remain polite, but the legislation focuses primarily on a financial reckoning (assessment) and punishment (penalty).
Put another way, HMRC is mostly about the money: tax, interest and penalties.
Weapons in HMRC’s armoury
Broadly, the closest that even the naughtiest taxpayers will have come to a criminal sanction is to risk a ‘COP 9’ investigation, where HMRC formally tells the individual taxpayer, under Code of Practice 9 (aka its contractual disclosure facility), that they are suspected of serious tax fraud, but HMRC will nevertheless offer immunity from criminal prosecution, and stay on the ‘civil’ route, so long as that taxpayer makes a full disclosure of wrongdoings. If they do not comply, prosecution will likely follow (an upbeat summary of a serious turn of events – note HMRC is notobliged to offer COP 9 and can instead pursue ‘cheating the public revenue’, or other criminal offences, from the outset).
Outside of COP 9, there is also the risk of bad publicity; HMRC almost always treats tax affairs as a private matter, but its Press Office will publicise successful criminal prosecutions.
There is also the risk of being publicly named and shamed as a ‘deliberate tax defaulter’ (FA 2009, s 94). Briefly, this is where a taxpayer under investigation is found to have deliberately underpaid tax of at least £25,000 (there is also a minimum threshold in terms of disclosure). Where the criteria are met, HMRC will publish the taxpayer’s details in a quarterly list, available online for one year. The £25,000 de minimis was set when the regime was introduced in its original form, in 2010; it is still relatively substantial 15 years on, but note the limit basically applies across all taxes. For example, omitted sales will often have both a profits tax component and a VAT component – and things can be significantly worse for companies.
There are also measures to discourage people from using tax schemes (and particularly from using them habitually), such as increased penalty rates and disclosure requirements – a kind of probation.
The scene now set, I will concentrate on HMRC’s growing appetite for targeted criminal sanctions.
Offshore tax evasion
There is a special place in tax Hell for those who try to hide their income or assets overseas (now TMA 1970, s 106B-H, introduced by FA 2016). This could be by failing to include the full amount of such income or gains, or by not telling HMRC about them in the first place. There is again a £25,000 tax de minimis, but also a potential sting in the tail; HMRC will be keen to see if the original source of the wealth that subsequently gave rise to the offshore income or gains, was itself properly taxed in the beginning – say, taxable interest on an overseas bank account that turns out to have been funded from historical business sales or profits that themselves were not declared to HMRC.
Another twist for the taxpayer is that, unlike more traditional criminal offences, this is a ‘strict liability’ matter, meaning HMRC has only to prove that the offence occurred, and not also prove that the taxpayer intended to commit an offence. This makes things much easier for HMRC, although the legislation does still provide for the taxpayer then to claim that they had a reasonable excuse (but this basically means that the taxpayer has to do all the work in this regard, such as proving that they took reasonable care with their tax affairs, rather than HMRC having to prove they did not).
Punishment can include a fine, imprisonment of up to 51 weeks, or both (the term is shorter in Scotland). Separately, there are civil tax-geared penalties of up to 200% of the tax underpaid, for offshore non-compliance (FA 2016, s 163; Sch 21).
Failure to prevent
The Criminal Finance Act 2017 (CFA 2017) introduced a ‘failure to prevent the criminal facilitation of tax evasion’ (CFA 2017, ss 45, 46, covering UK and offshore aspects respectively). This was aimed at businesses – companies and partnerships – because it was difficult for HMRC to prove that the directors or partners were acting dishonestly. So, it is again a ‘strict liability’ offence where HMRC is relieved of the usual burden of proving criminal intent.
Worryingly, this approach intentionally makes the directors or partners responsible for the actions of their employees or agents. However, there is again a defence if the company or partnership can prove that it had reasonable preventative measures in place, such as having regard to the size of the business: supervision, training, risk assessments and similar controls.
At the time of writing, it has been reported that HMRC has just started its first ever corporate prosecution under CFA 2017 s 45 of an accounting company in the Manchester area, in connection with alleged research and development tax credits repayments fraud. But note the scope of the regime is not limited to businesses such as accountants or solicitors, and applies more widely.
The Criminal Finance Act 2017 also permits HMRC (amongst others) to confiscate the proceeds of crime using civil powers, via an ‘unexplained wealth order’ against assets worth more than £50,000 (CFA 2017, s 1-6).
Security deposits or bonds
HMRC has long been able to demand that a business provide a sum of money as a security deposit or ‘bond’ for its VAT, PAYE and National Insurance contributions (NICs) liabilities. This protects HMRC where it suspects that directors or proprietors may fold a business, with significant VAT or payroll debts to the Crown (VATA 1994, Sch 11, paras 4(1A), 4(2); PAYE Regs SI 2003/2682, reg 97M-X; SSC Regs SI 2001/1004, Sch 4, para 29M-X).
There is a broad logic that the business has largely retained these amounts from other parties – employees, customers – so the money never ‘belonged’ to the business itself. The scope of the security deposit regime has since grown to include landfill tax, insurance premium tax and others.
Finance Act 2019 included provisions (subject to further regulation) to expand the security deposit regime both to corporation tax and to construction industry scheme retentions. Unusually, corporation tax is a tax on the business itself, rather than for a third party (FA 2019, s 82).
It is a criminal offence to fail to give security on direct taxes when formally required by HMRC. Perhaps worse, it is a criminal offence basically even to carry on the business if a VAT security is not given when required. And definitely worse, directors and officers can be put in a similar position to unincorporated business owners because they can be made jointly liable for any PAYE or NICs deposit required – see, for example, Benson v HMRC [2025] UKFTT 304 (TC).
Failing to disclose or stop promoting notifiable arrangements
In case tax advisers were feeling left out:
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Finance Act 2024 introduced a ‘strict liability’ criminal offence of continuing to promote a tax avoidance scheme when issued with a formal ‘stop notice’ by HMRC (now FA 2014, s 277A).
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HMRC is proposing yet another ‘strict liability’ offence, ostensibly in response to some mass-marketed avoidance schemes that HMRC thinks should be formally disclosed, or notified to HMRC – this time, the offence is that the promoter has failed to notify that scheme to HMRC.
Conclusion
This article provides a brief introduction to the significant expansion of criminal sanctions introduced at HMRC’s behest over the last few years. The original rationales may have been justified, but the day-to-day implementation is arguably less so. Adopting strict liability, effectively to transfer much of the usual burden of proof from HMRC to the taxpayer, has become routine for HMRC.
HMRC is steadily accumulating the means to effectively force businesses to cease trading and potentially even to bankrupt owners and directors. For example, the director in Benson was apparently not even a shareholder, but a turnaround specialist quite new to the company, and appointed because it was struggling financially. Nevertheless, he was soon made jointly liable for almost £200,000 (equivalent to the company’s then PAYE and NICs debt), as a security deposit.
In fact, that case was specifically about whether the taxpayer could be permitted to make a late appeal against the notices issued by HMRC. Unfortunately, he was denied because of his delay. Business owners, directors, and perhaps even some agents should be very careful of these burgeoning HMRC sanctions and seek advice accordingly.
