What are the penalties for tax evasion (UK)?

You may have heard about high-profile celebrities and personalities being involved in tax fraud scandals where they have knowingly hidden money in offshore accounts to stop it from being taxed. But how often does UK tax evasion happen in general?

HM Revenue & Customs (HMRC) estimated that in the 2016-2017 year the total cost of tax evasion in the UK was as much as £5.3 billion, for which the maximum sentence in the UK is up to seven years in prison or an unlimited fine. These tax evasion penalties are mainly for cases where people have deliberately hidden away funds or committed fraud to avoid having to pay what they owe, but there are also numerous cases of people simply failing to file their tax returns to report taxable income or gains. Even barristers have been known to do this.

I have put together a brief guide on what tax evasion is, and the tax evasion penalties you can expect, including the maximum penalty for tax evasion in the UK, from not paying tax on time, either accidentally or on purpose.

What is tax evasion?

Tax evasion usually refers to the deliberate dishonest non-payment of tax that is legally due by claiming to take advantage of non-existent loopholes in the law or attempting to conceal funds or misrepresenting receipts or expenses to HMRC.

Fundamentally, this means knowingly not declaring exactly how much taxable income or gains you’re receiving, for the purposes of reducing the amount of income tax you pay.

Whilst it can occur on an individual level, tax evasion also takes place at a more complex level by business owners as their affairs often provide greater scope to conceal or suppress reportable income or gains.

Tax avoidance as distinct from tax evasion often occurs due to human error. Poor record-keeping, failing to file a tax return on time and failing to register a new business are all examples of tax avoidance arising from mistakes, though you can still be prosecuted if HMRC suspects that it was deliberate and not an honest mistake.

What is the difference between tax evasion and tax avoidance?

While tax evasion law applies to an individual or business deliberately subverting the tax system and is criminal, tax avoidance involves using the law to your benefit and arranging your finances in a way that reduces the amount of tax paid but in a way that is arguably lawful. Tax evasion usually carries with it a heavy maximum penalty amounting to seven years in prison or an unlimited fine, it is rarely taken lightly.

Tax evasion examples

• Non-reporting of taxable trading income or suppression of trading revenues or failing to file tax returns
• Importing goods VAT-free, selling them to customers and charging them VAT and then disappearing without accounting to HMRC for the VAT charged – otherwise known and missing trader fraud and its cousin carousel fraud
• Claiming to have made tax allowable expenditure on film production or eco-forests to support a claim for a tax allowance but diverting the funds to other uses instead of the claimed purpose
• Creation of false invoices to support claims for non-existent expenditure or claiming personal expenditure on home renovations as the expenses of a building trade
• Failing to declare imported goods or dishonestly understating the value of imported goods in order to evade import duties
• Using cash or cryptocurrency to carry out taxable transactions in order dishonestly to avoid a traceable record of the trading transaction
• Assuming the identity of someone else to carry out taxable transactions in their name and then retaining the proceeds and disappearing

There are also tax avoidance schemes that exist (such as a stamp duty avoidance scheme) that encourage people to make a complex set of transactions that will ultimately save them money on tax.

Unfortunately, these are normally ‘too good to be true’ and will often end up costing the tax-avoider more in the long run, as well as get them into trouble with HM Revenue & Customs.

What are the penalties for tax evasion (UK)?

Depending on the circumstances, tax evasion can result in heavy fines and the maximum penalty for tax evasion in the UK can even result in jail time. Punishment and the average tax evasion sentence can vary, so below are a few examples of penalties that can be incurred:

• Income tax evasion penalties – summary conviction is 6 months in jail or a fine up to £5,000. The maximum penalty for income tax evasion in the UK is seven years in prison or an unlimited fine.
• Evasion of VAT – in magistrates court the maximum sentence is 6 months in jail or a fine up to £20,000. Crown court cases can be a maximum of seven years in prison or an unlimited fine.
• Cheating public revenue – due to the serious nature of the crime, the maximum sentence for cheating public revenue in the UK is life in prison or an unlimited fine.
• Providing false documentation to HMRC – either magistrates’ court or as a summary conviction, HMRC tax evasion penalties can range from a fine of up to £20,000 or up to 6 months in prison.
• Evasion of duty (smuggling) – for a summary conviction the maximum UK sentence is a fine up to £20,000. Crown court cases can be a maximum of seven years in prison or an unlimited fine.

How do HMRC investigate tax evasion?

If you are being investigated for tax fraud the chances are that an HMRC Fraud Team has noticed an inconsistency with your tax return or has discovered some suspicious activity surrounding your accounts. They use a database known as ‘Connect’ to help HMRC investigate tax evasion, which literally connects the dots and finds out if you are declaring less income than you seem to be earning.

Have you been reported for tax evasion?

In other instances, a business or individual may have been reported for tax evasion to the HMRC by someone aware of your activities or even an anonymous informant. Social media also plays a big part in revealing to HMRC the lifestyles of certain people under investigation, which might be inconsistent with how much income they are declaring.

How do HMRC investigate offshore accounts tax evasion?

In terms of offshore accounts and tax evasion, HMRC will reach out to international bodies to discover if British citizens are circumventing tax laws and deliberately moving funds to stop themselves from being taxed.

To find out more about tax evasion, or if you are in need of an experienced tax barrister to defend your tax investigation case against HMRC, click here or call 020 7242 2744 to instruct Patrick Cannon.