Tax crackdown to target middle class

Middle class workers will be targeted in a new crackdown on tax evasion promised by the chief prosecutor of England and Wales.  The crackdown on tax evasion is aimed at sending a “clear message” to consultants who push dishonest schemes and the professionals who invest in them, the Director of Public Prosecutions (DPP) has said.

The Crown Prosecution Service (CPS) will dramatically ramp up the number of tax evasion cases it takes on – with a view to prosecution – over the next two years, Keir Starmer, the DPP, has said. The CPS will increase by 500% the number of tax files it handles, to 1,500 a year by 2014-15. This compares with 200 tax convictions the CPS secured in 2010 – its current conviction rate for tax cases stands at 86 per cent.

“There have been some cases involving lawyers, some involving tax consultants, and plumbers,” Mr Starmer said in an interview. “Within the ramped-up volume, it’s intended that we will select cases to send a clear message as to the breadth of our coverage.”

His comments come amid wider scrutiny of the tax affairs of household names, both corporate and celebrities, as the prolonged financial downturn causes aggressive but legal tax avoidance to attract widespread criticism, as Starbucks found to its cost last month.

Multinational companies are also being investigated over £1bn of UK taxes that may have been avoided by transferring profits earned in Britain to their parent companies or to lower tax jurisdictions, it is disclosed today.

The issue has seen foreign giants including Amazon, Facebook and Google face increased scrutiny by HMRC’s Large Business Service over how much they contribute to the UK economy despite generating large revenues.

An accounting method, known as transfer pricing, can involve a parent company charging its regional divisions in the UK a royalty fee for its brand name and corporate marketing benefits, with the payments being transferred directly to the head office abroad.

In other firms, the brand name, trademarks or research and development services are registered not in the UK, but in another country with lower tax rates such Luxembourg or Ireland. This has the effect of magnifying profits in the lower tax jurisdiction and minimising them in the UK.

The £1bn under investigation represents a 47% increase in transfer pricing investigations over the last 12 months. A review of the transfer pricing system is already being conducted.

Meanwhile, Goldman Sachs became the latest multinational company to attract negative headlines: last week it backtracked on proposals to delay awarding bonuses to its UK bankers until the next fiscal year in order to benefit from a cut in the top rate of tax.

Mr Starmer will publicly relay the CPS’s new approach in a speech on Tuesday. He is expected to dispel the idea of tax evasion as a victimless crime, stressing that tax cheats cost each household the equivalent of £533 a year.

The CPS’s tougher stance matches that of HM Revenue & Customs – which investigates cases before referring criminal files to the CPS – as both organisations try to rein in the £14bn a year that the economy loses from tax evasion. HMRC’s prosecution office was merged into the CPS in 2010.

“This represents a significant policy shift. Historically the Revenue has been a reluctant prosecutor, preferring to concentrate on tax collection and bringing deterrent prosecutions only in the most blatant cases,” said Jonathan Fisher QC, a barrister who specialises in tax cases.

In targeting those who invest in schemes or do not declare their full income, Mr Starmer has chosen what could be labelled low-hanging fruit. Middle-class cases are easier to prosecute and less costly whilst they also attract a lot of publicity, hence achieving deterrence.

It is carousel fraud that haemorrhages the most money from the economy, estimated at £6bn a year, making it the biggest single source of tax evasion. Organised criminals operating across borders are often behind such scams, making them difficult to prosecute.

 

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