Tax cheats cost far more than benefits cheats – yet far fewer are prosecuted

Analysis of HMRC data shows that the political culture is far more sympathetic to tax avoiders

Social security benefits come in many shapes, including the state pension, pension credits, income support, disability living allowance, employment and support allowance, jobseeker’s allowances and housing benefits.

The total cost of all benefits for 2013-14 is about £164 billion. Around £1.2 billion or 0.7 per cent of the total is attributed to fraud. Benefit fraud has continued to average between 0.6 per cent and 0.8 per cent for the period 2005/06 to 20013/14.

The government has set-up a benefit fraud hotline and people are encouraged the blow the whistle on their neighbours and anyone else suspected of fraud. The sanctions instituted by the government include a £50 spot fine, without a court order, on individuals who mistakenly provide inaccurate information on their claims forms.

Those suspected of fraud may be able to pay fines of between £350 and £2,000 in lieu for prosecution. From April 2015, the upper limit of the fine will be £5,000. Some may lose their benefits altogether for a fixed period. Private debt collection firms, bailiffs and forced house sales are used to collect penalties.

Suspects can be charged under the Fraud Act 2006, which carries a maximum prison sentence of up to 10 years.

The ministerial replies in parliament have provided data about the number of cases investigated by the Department of Work and Pensions’ Fraud Investigation Service:

Fiscal Year

Cases closed with recoverable overpayments

Cases prosecuted

2008-09

28,452

8,840

2009-10

37,499

8,198

2010-11

46,238

9,961

2011-12

50,509

n/a

2012-13

35,196

9,836

The data for the criminal convictions for England & Wales is as follows:

Fiscal Year

Custodial Sentence

Non-custodial sentence

2010-11

312

7,514

2011-12

403

8,911

 

Number of criminal convictions for benefit fraud offences for overpayment amounts within specified data range in England and Wales:

Fiscal Year

2010-11

2011-12

£0-£1,000

282

397

£1,001-£5,000

2,941

3,125

£5,001-£10,000

1,871

2,331

Over £10,000

2,083

2,909

Grand total

7,177

8,762

 

The number of prosecutions for Scotland is as follows:

Fiscal Year

2011-12

2012-013

£0-£1,000

16

15

£1,001-£5,000

362

424

£5,001-£10,000

301

312

Over £10,000

348

427

Grand total

1,027

1,178

 

The above data shows that most of the criminal convictions are for frauds of less than £10,000. In 2011, two-thirds of fines imposed were for £200 or less. The largest fine imposed was £5,000. For the period 2008-2012, some 1,306 offenders received a prison sentence.

Now let us look at tax avoidance and evasion. HMRC admits to an annual tax gap – that is tax avoidance, tax evasion and monies not yet collected – of £34 billion for 2012-13, which is about 6.8 per cent of total tax liabilities.

HMRC admits to tax evasion of £4.1 billion and claims that avoidance schemes subject to scrutiny account for £3.1 billion. HMRC’s model is challenged by others who put the tax gap at around £120 billion. Even in 2004, a former World Bank adviser was saying that the UK is losing over £100 billion a year to tax avoidance and evasion.

HMRC statistics do not attach adequate weigh to profit shifting by companies to avoid taxes. These practices have been highlighted by the Public Accounts Committee and media coverage relating to Microsoft, Shire, Amazon, Starbucks, eBay, Google, Apple and others. It does not include the scams highlighted by the recent HSBC scandal which show that for the period 2005-2007 over 100,000 individuals, including 8,844 UK residents, may have evaded taxes on $120 billion of wealth.

The Luxembourg leaks showed that PricewaterhouseCoopers manufactured tax avoidance schemes at an industrial scale to enable large corporations to avoid tax, but HMRC methodology does not adequately account of such matters. So there are big questions about the poverty of HMRC data.The prosecution and conviction data is scattered but the following ministerial statement in parliament provides a good indication of the trends.

Total number of individuals prosecuted and convicted for tax offences:

Year

Prosecutions

Convictions

2007-08

526

638

2008-09

416

469

2009-10

296

419

2010-11

402

327

2011-12

497

399

 

HMRC’s 2013-14 report states that during the year 421 individuals were detained after arrest by HMRC officers, but none were charged.

Like all statistics, the above is incomplete and begs many questions. Nevertheless, some preliminary conclusions can be reached. The amounts attributed by the government to tax avoidance and evasion are much larger than the amounts attributed to benefit fraud. But the number of prosecutions and convictions for benefit fraud are much greater.

The political culture is more sympathetic to tax avoiders. HMRC was made aware of the HSBC tax frauds in 2008, but so far only one person has been charged. An excuse offered by HMRC is that it likes to make financial recoveries and thus does not go for prosecutions. Yet the same standard is not applied to benefit fraud.

On a number of occasions, the courts have declared some of the tax avoidance schemes to be unlawful. This has not been followed-up by any investigation or even recovery of the cost of fighting the schemes.

Big accountancy firms are often the brains behind the schemes but no firm or partner has ever been fined even after the schemes have been declared unlawful. The same firms are given taxpayer-funded contracts, such as those relating to privatisation and Private Finance Initiative (PFI). Their partners advise HM Treasury and other government departments. The firms fund political parties and also provide jobs for former and potential ministers.

In April 2013, the government introduced rules to ban companies and individuals who took part in failed tax avoidance schemes from being awarded government contracts. So far, no such business has been barred.

Prem Sikka is professor of accounting at the University of Essex

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