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What are the penalties for tax evasion in the UK?

1 September, 2021

If you are being investigated for tax evasion it is highly likely that HMRC has discovered irregularities which it believes are suspicious or has found inconsistencies in your tax return or company accounts.

Using a database called ‘Connect’, which analyses large amounts of data and which produces patterns and reports, provides HMRC with leads. HMRC may use this information, along with other sources of information to launch an investigation.

What are the possible penalties for tax evasion in the UK?

The penalties for tax evasion can be financial, criminal and in some instances both.

The majority of cases of tax fraud and evasion are usually dealt with via HMRC’s civil procedures.

HMRC will only prosecute you for tax evasion if the evidence shows that there has been a criminal offence committed and it is in the public interest.   This is called the 2-stage test for prosecutors.  The evidential test and the public interest test.

One of HMRC’s objectives, when proceeding with prosecutions, is to act as a deterrent that sends a clear message of their zero tolerance of tax evasion, either individual or corporate.

If you’re found guilty of tax evasion, there is a risk of a prison sentence, dependent on the severity of the tax evasion.

How penalties are determined

HMRC will investigate reasoning for the under payment of tax and the amount due.

This will result in your tax underpayment case being placed in one of four categories.

These are:

Mistake or misinterpretation

  1. If you have made a genuine mistake which has resulted in an underpayment of tax, HMRC will treat it as an honest mistake.  
  2. There is unlikely to be any penalty imposed as long as the underpaid tax is paid.

Failure to take reasonable care

  1. If a taxpayer fails to take due care when filing a tax return, such as failure to fill in a supplementary form, the HMRC regards it as a failure to take reasonable care.
  2. The HMRC regards this as a moderate offence and could result in a penalty of 30 per cent of the tax owed.

Deliberate understatement

  1. If HMRC concludes tax liability was deliberately understated, it is regarded as serious tax fraud.
  2. This could apply if the taxpayer deliberately overstated the level of their expenses or allowances.  
  3. Because this is treated as tax fraud, it could result in a tax evasion penalty of up to 70 per cent of the tax owed.

Punishment for not declaring income

  1. The most severe tax evasion UK penalties that can be charged are for deliberately misleading HMRC when completing a tax return and then taking steps to hide, or attempt to hide, the fraud.
  2. It might apply if relevant documents have been destroyed or money has been moved to offshore bank accounts.  This type of fraud can result in penalties up to 200 per cent of the tax due.

Income tax evasion

Summary conviction for evaded income tax carries a six-month prison sentence and a fine up to £5,000.

More serious cases of income tax evasion can result in a sentence of up to seven years imprisonment.

Sentences can be increased, and an unlimited fine imposed, if the taxpayer fails to repay the evaded tax.

VAT evasion penalties

In the magistrate’s court, the maximum prison sentence for the evasion of VAT is six months. Fines of up £20,000 can also be levied.
More substantial cases of VAT evasion that are sent to the Crown court can carry prison sentences up to seven years and unlimited fines.

Providing false documentation to the HMRC

If you provide false documentation to HMRC, it can result in a maximum penalty of a £20,000 fine or a six-month prison sentence.

Cheating the public revenue

This is the criminal charge most often levied by HMRC in cases of serious tax evasion. The maximum sentence for this offence in the UK is life in prison and / or an unlimited fine.

Corporations can also be criminally liable

If an employee or an associated person facilitates tax evasion while working on behalf of a company, the company itself can be held criminally liable.

The Criminal Finances Act 2017 builds on the Bribery Act 2010 which had already deemed it a criminal offence for businesses to evade tax.

However, the 2010 Act made it hard for the authorities to prove that a business had been complicit in tax evasion.

As well as running the risk of serious reputational damage, failure to comply with this legislation could result in a substantial financial penalty being imposed.

If one of your employees or an associated person facilitated tax evasion, the company must prove that it had adequate procedures pursuant to s.7 of The Bribery Act 2010.

Being found guilty of an offence under the Criminal Finance Act 2017 can result in penalties up to 200 per cent of the tax due and a possible prison sentence.

Steps you can take to reduce HMRC penalties

Our experienced legal team at Richardson Lissack which comprises of accomplished corporate crime solicitors, ex-HMRC officers and commercial tax litigators, can help you try to reduce HMRC penalties as a result of a tax evasion investigation or avoid criminal proceedings.  They understand the process, approach and procedures most regularly taken by the HMRC and in some circumstances can negotiate a favourable settlement for our clients.

If you are currently being investigated for tax evasion, contact Richardson Lissack today to learn more about how we can help.