Tax nous could be the best weapon in the fight against fraud

Tax investigations lawyers have the skills to unpick fraud cases – just ask Al Capone

When asked if he was a bootlegger, Al Capone once said: ‘Sure, and some of our best judges use my stuff.  His brazen attitude drew the contempt of law enforcement officials who tried for years to convict him of any crime.  As we know, in the end it was the tax man who got him, sending him to jail for income tax evasion in 1931.

These days any self-respecting firm that advises on tracing and recovering the proceeds of fraud has teams that not only deal with the civil side but also the criminal side too.  There is often friendly banter as to who has the best legal weapons to crack down on fraudsters, but the story of Al Capone should remind us of our tax investigations colleagues.

There is a potential tax angle to most commercial frauds, because profits derived from the fraudulent course of conduct will potentially be taxable.  There is no over-arching rule of the UK law that necessarily prevents income being taxable just because it is derived from an illegal activity.  Criminal conduct might result in a tax liability arising even where a person derives no actual benefit from their crimes.  For example, a person who smuggles goods into the UK illegally will usually be liable for any relevant import taxes – even if the goods are confiscated by customs – because such taxes relate specifically to the import process and not to the profits derived from any subsequent sale.

It is important to bear in mind that broad general powers of confiscation now exist in the UK in relation to the proceeds of crime.  These powers would not necessarily be relevant to tax liabilities arising from illegal activities because the relevant benefit would often be no different from the tax already payable. But situations can arise in which the cost of a tax payment is not deducted when calculating the amount that should be confiscated from a criminal.

Sounds harsh? Well, try this real case involving the conduct of a substantial plant hire business that was conducted (by a millionaire) through the use of stolen items of industrial plant.  The business was legitimately registered for VAT and so one of the questions for the court, when seeking to quantify the proceeds of the trader’s crimes, was whether the gross amount of the business’s trading income should be reduced by the amount of VAT which the trader had legitimately charged to customers and then correctly paid over to HMRC.

The court held that no deduction should be permitted for legitimate VAT costs in such a situation because the entire transaction price, including the VAT element, had derived from the commercial use of stolen goods.

Another recent case saw failed criminal prosecutions in the courts being followed by successful levying of UK taxes against one of the individuals involved in the allegedly criminal activity.  In this case the Serious Organised Crime Agency, as was, exercised its statutory powers to undertake the tax assessment functions of HMRC (stepping into its shoes) in respect of suspected criminal gains. 

These cases highlight the fact that there is often a possible tax angle to any fraud cases, which can easily be overlooked.  Remember Capone, remember the tax man.

Stephen Ross, head of civil fraud, Withers