Tax evasion is the deliberate and dishonest non-payment of tax that is legally due. This is done by claiming to take advantage of loopholes in the law that don’t actually exist, or concealing/deliberately misrepresenting receipts to HMRC. Tax evasion can happen on a small scale from individuals, it is most common at the business level because business affairs offer more scope to conceal taxable income or gains from HMRC.
In June 2019 HMRC calculated that in 2017-2018 the total cost of tax evasion to the UK was £5.3 billion. Due to the effect tax evasion has on the economy it is taken very seriously by the government and is even considered a criminal offence.
How is tax evasion investigated by HMRC?
Tax evasion investigations are often prompted when HMRC notice some irregularities in your tax returns or suspicious activity in your bank account. HMRC have a database known as ‘Connect’ which they can use to see if you have more income than you are declaring.
The Connect detection systems on detect a small number of tax evasions. HMRC also has a number of other detection systems they can use. For example, social media is a good indicator of whether someone has a lifestyle more extravagant than their declared income would allow. Additionally, HMRC relies on anonymous informants; these could be individuals who are suspicious of your activities or a business.
Penalties for tax evasion
Tax evasion is taken very seriously in the UK. It is considered a crime and the maximum sentence can even include a prison sentence. As tax evasion can be perpetrated in many different ways the type of penalty you are likely to receive depends on the circumstances. Below is a brief summary of the more common forms of tax evasion and the penalties they levy:
- Income tax evasion – maximum sentence is 7 years in prison or an unlimited fine. You can also be convicted summarily which carries 6 months in prison or a fine up to £7,000.
- Evasion of VAT – this depends on whether the case is heard in magistrates or crown court. In magistrates court the maximum is 6 months in prison or fine up to £20,000. In crown court the maximum is 7 years in prison or an unlimited fine.
- Cheating public revenue – as this offence involves public funds it is considered a very serious offence and the maximum is life in prison or an unlimited fine.
- Providing false documents to HMRC – maximum penalty is a fine up to £20,000 or up to 6 months in prison. This can be from either the magistrates court or by summary conviction.
- Evasion of duty – also known as smuggling. This is either a summary conviction for a fine up to £20,000, or a crown court case with a maximum of 7 years prison sentence or an unlimited fine.
It’s therefore clear that the penalty really depends on how the tax evasion has been done. It also depends on the severity of the offence and so the court in which the case is brought.