HMRC probes professional services firms to tackle tax evasion

27 March 2019 3 min. read
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With wealthy clients continuously turning to consulting, accountancy and law firms to help circumvent national tax schemes, thousands of such firms have suddenly been placed in the centre of thousands of tax evasion cases. The UK tax authority has issued thousands of production orders to professional services firms relating to investigations into tax evasion.

The Panama papers caused a wave of indignation to sweep the globe; however, their release ultimately did little to persuade legislators to take action. Despite growing global outrage at the existence of tax havens, the schemes for massive global conglomerates to swerve paying their share seem more popular than ever. Last year, an academic study found that that just 11 tax havens soak up some $616 billion in profits, as companies continue to leverage legal loopholes to move profits away from domestic tax regimes.

As clients continue to seek the loopholes necessary to shield their profits from taxation, there is a growing demand for consultants to help navigate the shifting landscape. This was illustrated by McKinsey & Company’s high profile addition of Sir Edward Troup in late 2018. Troup is a former civil servant, having worked with HM Treasury and then HM Revenue & Customs, and has long been a fierce critic of taxation, having previously said that "tax avoidance is not a moral issue", while describing tax itself as "legalised extortion".HMRC probes professional services firms to tackle tax evasion

Such is the expectation placed upon professional services firms to live up to this function of helping wealthy clients avoid domestic taxation, that they have even been targeted by legal action when they allegedly ‘fail’ to do so. Notably, Big Four firm Deloitte and legal giant Linklaters faced a lengthy feud with a former Arsenal investor, who claimed the pair’s negligence had caused her to have to pay tax on her sale of the football club’s shares. In the end, Lady Nina Bracewell-Smith settled her negligence claim against the two firms for more than £11 million.

In this context, it is not especially surprising that the UK’s tax body, HMRC, has decided to target professional services firms with regards to a large number of tax evasion cases. Between March 2017 and 2018, HMRC issued 1,414 production orders to accountancy, law and other professional services firms, in relation to investigations into tax evasion. While the number of orders has shrunk slightly from the 1,507 orders sent between March 2016 to March 2017 – which spiked from 1,276 the previous year – it still demonstrates how integral professional services firms have become to the phenomenon of tax evasion.

The orders, issued by HMRC’s Criminal Investigation Directorate, request that professional services firms surrender potentially incriminating information on their clients. While the number of orders is said to have fallen slightly according to RPC, HMRC is increasing the number of criminal investigations into those participating in arrangements designed to cut their tax bills. The City of London law firm said this could include employee benefits trusts and film financing investments. This represents a major shift, as HMRC historically favoured civil action against such individuals using tax tribunals, but is now launching criminal investigations.

Commenting on the news, Adam Craggs, Partner at RPC, told accounting news site Economia that even the commencement of a criminal investigation can have “serious practical difficulties” for businesses, and the length of these investigations can cause “a great deal of stress”. However, HMRC argued that this was not the case, and that it could not turn a blind eye to fully fledged fraud.

A spokesperson from HMRC stated, “Tax planning isn’t a crime and HMRC only criminally investigate arrangements presented as avoidance or tax planning if it is suspected they were actually fraudulent.”