Living in fear of a visit from the taxman? This article considers how HMRC plans a dawn raid and how to mitigate the damage if your business is unlucky enough to be targeted
The company’s directors will find out about a dawn raid when they get the early morning knock at the door, and the public will find out about it when news of the raid hits the press, but an HMRC tax fraud raid will have been months in the planning and executed without warning.
Tax fraud investigations are mainly intelligence-led and a substantial amount of evidence is collated long before that knock on the door. Once a target is identified, HMRC liaises with its counterparts in the National Crime Agency (NCA), Serious Fraud Office (SFO) and the Financial Conduct Authority (FCA) to facilitate information sharing though its legal gateways, where appropriate.
In cases of international tax fraud, HMRC makes full use of mutual administrative and legal assistance agreements to ask foreign jurisdictions for property to be searched, individuals to be interviewed, computers to be imaged and banking documentation to be obtained.
HMRC has a number of liaison magistrates stationed abroad, as well as having a permanent member seconded to EU agency Eurojust to facilitate effective judicial cooperation between EU member states.
Conducting the raid
Meanwhile in the UK, production orders will also be served on third parties such as estate agents, and suppliers of luxury goods such as cars and yachts, to produce documentation. In addition to those production orders, HMRC will use directed surveillance to establish which properties the target has access to so that it can ensure that it has requested an appropriate warrant for each premises.
HMRC will coordinate the execution of the search warrants both in the UK and abroad to ensure that evidence is not lost or destroyed. HMRC officers will also serve Serious Organised Crime and Police Act 2005 disclosure notices on other third party premises, such as solicitor’s offices, accountancy firms or associated companies, to ensure the production of relevant documentation and securing of witness statements at the same time as the raid is taking place.
Actions and responsibilities
When HMRC come knocking at the door, it should have a search warrant. A designated employee should check the warrant to ensure that the name of the company and the address relates to the premises which HMRC is proposing to search and that the date of the warrant is still valid. The scope of the documents and evidence will be specified in the warrant. Each investigator should have their HMRC ID.
During the raid, each investigator should be shadowed by an employee and an additional copy of each document should be taken by the employee. The employee should make sure that no legally privileged documents are seized and he should also make sure that no documents are taken which fall outside the scope of the inquiry.
A note should be taken of any questions from the investigator, along with answers given; care should be taken to ensure that members of staff do not incriminate either themselves or the company.
As accountancy advice is not privileged, it is imperative that all key meetings with clients should have a lawyer present.
Legal professional privilege should be asserted over any legal communications between the company and its lawyers, created for the purpose of actual or potential litigation. As accountancy advice is not privileged, it is imperative that all key meetings with clients should have a lawyer present so that legal professional privilege can be asserted over the meeting notes, should that documentation be sought from the accountant.
In such an event, HMRC will instruct an independent lawyer to look at the documentation, but this will be an onerous task to undertake on the premises, and in practice such documentation will be sealed and sent to independent counsel to be assessed.
The individuals whom HMRC believes are responsible for tax fraud will be arrested on the day of the raid and taken to a pre-determined police station, where HMRC will interview the suspect under caution. This is generally the first of several interviews conducted over the next few months and it is imperative that the suspect has access to advice from a lawyer who specialises in tax fraud litigation to ensure that the suspect is properly represented in the interviews.
Following up the raid
Immediately following a raid, it is essential that an experienced legal and accountancy team is put in to place at the earliest opportunity to assess the evidence seized and to supervise the investigative process on behalf of the company.
Copies of the seized documents, as well as the electronically imaged data, should be catalogued and kept in a secure room so that an internal audit of the documents seized can take place, facts can be established and the best course of defence action can be determined.
The physical location of the documents seized, as well as who controlled the documentation in question, is a good starting point; that information is often readily available from the seized property logs compiled by HMRC officers during the raid. Other ancillary issues which will need to be managed include the reputation of the company, possible civil litigation and employment law issues.
Despite the fact that it is almost impossible to predict when and where a raid will happen, it is still possible to plan for an HMRC raid as part of a company’s strategic risk management plan.
Ensure that training is given to employees so that they know which powers are available to HMRC when it conducts a raid
It is important, for example, to ensure that training is given to employees so that they know which powers are available to HMRC when it conducts raids.
Employees should be given a list of procedures which should be followed in the event of a raid. Key staff should be aware of their individual responsibilities; not only senior executives but also receptionists who are likely to be the first people to have contact with HMRC, as well as the IT department who are likely to be present when computers are imaged.
Companies should make sure that they have a list of key telephone numbers available which employees should call in a crisis, and the client’s accountants and lawyers should feature high on the list. It is advisable that the company has a retainer with a law firm which specialises in criminal tax investigations.
Should a raid take place, all of the due diligence will have already been completed and a specialist lawyer will be immediately available to assist the client. Companies with offices abroad should also have a similar retainer with a law firm in that country to ensure a similar service.
As HMRC has access to more information than ever before, particularly from abroad, it is likely that criminal tax investigations will be on the increase. The steps that a company and its advisers take before, during and after a raid will have a major bearing on the defence strategy available to both the company and the suspects involved in the criminal investigation.
The success or otherwise of that strategy will be measured in terms of criminal penalties and reputational damage at the end of the investigation.
With thanks to Tessa Lorimer LLB who is special counsel, tax disputes and investigations practice at Withers LLP, the author of this article.