For every individual who pays his tax and business that reports its profits exactly, there must be somebody who under-declares their income or business that hides its success from the tax man. Tax evasion is massive and its extent can never be fully known.
Tax fraud is a big problem for because it is easy to commit. Anybody can withhold information from the Revenue and stand a fairly good chance of going 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. Often these contractors would not declare their income to the tax man. 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 resources available to the Revenue are dwindling and it follows that fewer taxpayers are being scrutinised. All that is needed to get away with paying the full amount due is to fill out all the returns on time with information that seems reasonable.
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. What is more, if criminal sanctions are pursued by the authorities, they may employ the statutory assumptions introduced by the Proceeds of Crime Act 2002 and lose all their assets and a lot more!
When deciding how much tax a business should have paid, the tax authorities will employ their own assumptions. 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 up to the tax payer to demonstrate if the case is otherwise and often this will require the services of an experienced fraud specialist forensic accountant.
Forensic accounting techniques can provide the reconstruction of records if some are missing and show independently the real position 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.
Mark Jenner is a Fellow of the Institute of Chartered Accountants in England and Wales, a Certified Fraud Examiner and has a Masters Degree in Fraud Management. He runs his own business as a forensic accountancy firm specialising in all forms of tax fraud including vat fraud and self employment matters.
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