Investigating Income Tax Frauds

There is an underlying practice for many businesses to operate under the taxation authorities radar

. They are never registered and use staff that is supposedly self employed, and who do not declare any tax themselves.

Tax fraud is a big problem for because it is easy to commit. It is possible to hold back on disclosure from HMRC and the odds are that there is a good chance of remaining undetected. To keep all of their self employed pay many people will take the risk and try to stay off the tax authority records completely.

When forensic accountants specialising in tax investigation carry out enquiries into some companies they sometimes find that the whole workforce are employed on a self employed basis. The building trade saw a lot of this when the trend was to use subcontractors remunerated in cash. These third party sub contractors being self employed would often declare lower incomes than actually earned or sometimes nothing at all. With the authorities having addressed the problem in this area, building subcontractors are now better controlled and find it much harder to evade the tax that they rightfully owe. But away from the building trade there are still industries where it is possible to circumvent the rules and regulations and have a good chance of evading detection.

It is accepted that the way in which the current laws are enforced would have to change in order to prevent many self employed from not declaring the tax they owe. However, there is an equally large problem with people who set up the businesses that always under-declares taxes. HM Customs and Revenue is a public sector organisation under severe pressure to cut its costs of operation. The resouces available to the Revenue are dwindling and it follows that fewer taxpayers are being scrutinised. So long as a business fills out all its forms on time and enters numbers that at least look reasonable they may well be able to get away with paying little or no tax.

If they do get detected the punishments are fortunately quite severe. It is possible for all the profits made by a business to be taken latterly as tax and penalties if they are not declared properly. And if the tax man decides to proceed down the criminal sanction route, there is the probability that statutory assumptions flowing from POCA 2002 will be made and avoiders will lose more than the tax they tried to save!

The tax regulators usually employ their own specific assumptions when assessing how much tax a company should have been paying. They might assume for example that all revenue is subject to tax and that no expenditure can be used to offset a liability. It is the responsibility of the tax payer to show otherwise and one of the best ways to do this is to use experienced forensic accountants.

Forensic accountants are able to recreate accounting records from partial accounts and present an independent and hopefully reasonable picture of the profitability of the business. There is always the risk that the authorities, including the criminal courts, will not accept these explanations and the answer is that it is better for businesses to keep adequate records and disclose all of its profits at the appropriate time.

by: Mark Jenner

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