UK Targets Tax Evaders With New Rewards for Whistleblowers Plan

The UK tax authority, HM Revenue & Customs, is taking a leaf out of the IRS’ and the Canadian Revenue Agency’s playbook and offering informants a cut from any tax collected from information provided.

The details of HMRC’s cash-for-tax-tips program are scant, but creating a tax whistleblower program across on this side of the Atlantic will be interesting, because like the differences between British, American, and Canadian English, the common law systems of each country are not identical.

HMRC currently relies on the majority of people wanting to “do the right thing” and pay what they owe in tax. It helps that with the Pay-As-You-Earn system, the majority of taxpayers have no real choice.

However, there has always been a minority of people who try to pay less tax than they should—or no tax at all. These people often come to HMRC’s notice, either through its own activities or through information provided by the public.

Sometimes, the informant is motivated by public duty. Other times, it’s by jealousy or desire for revenge—such as the brother who sent copies of confidential documents from his sister’s divorce proceedings to the Inland Revenue (as HMRC was then) to get her former husband in trouble. HMRC doesn’t really care—they welcome information no matter the reason.

It’s only on rare occasions that a person is motivated by the thought of a payday when they give HMRC information. They often are happy to benefit from the fraud until they are cut out, think they are no longer getting their fair share, or are cheated upon either in love or business.

This new cash-for-tips program therefore may not lead to many more reports to HMRC—and those seeking to use it could find themselves in trouble.

Imagine you suspect your boss is routing invoices through an offshore company he owns but hasn’t told anyone about, and you know that HMRC will pay for information that leads to this tax evasion being stopped. You then go snooping through the business records, get caught by the boss, and end up fired, assaulted, or worse.

Although it sounds like the plot of a bad beach holiday novel, it’s not outside the realms of possibility. Does HMRC owe you a duty of care? Does it matter if you found out anything they could use, or if you had already contacted them?

When you speak now to HMRC , they will warn you not to put yourself in danger, but that dynamic changes when money is on the table.

Also, with the current “no-win-no -fee” system where lawyers will take your case for a cut of any damages won rather than a fee for hours worked, one can envisage the Exchequer collecting £100,000 in evaded tax, and HMRC paying out £250,000 in damages for injuries sustained.

What about breaking the law? An informant may have stolen the documents or other information given to HMRC, or may break the law after speaking to HMRC officials.

Although there should be little sympathy for the person whose information has been stolen if that person is breaking the law, can a government department encourage such behaviour? They can, according to the Regulation of Investigatory Powers Act 2000.

Does the amount matter? If we are looking at something the size of the Swiss Bank tax evasion scandals, where nine or ten figures were involved, I think everyone would encourage reporting it, but what about the more mundane cases involving a few thousand? Do the ends justify the means?

This brings in the question of profiting from a crime. A person could steal documents and then ask for a cut of the money recovered from the tax evaded. In the US program this seems fine—people involved in tax evasion can report on their co-conspirators, go to jail, and collect the cash when they come out.

That was the case with Bradley Birkenfeld, who got $104 million from the IRS. Whether that would play well in the UK justice system is unclear

Finally, and this is a tax question, should the recipient be paid net or gross—is the amount they receive taxable? This could depend on why and on whom the whistleblower is informing.

If it’s their employer, HMRC could argue that the payment arises due to the employment—they wouldn’t be in a position to collect the reward money if they weren’t employed by the tax evader—and so seek to tax it. If the whistleblower isn’t an employee, the payment could still be taxable if the informant deliberately went about finding information to collect the reward money.

Special legislation will likely be needed to make any reward money free of tax, unless the government wants to give with one hand and take away with the other.

Overall then, a UK tax whistleblower payment program is a good idea and, if it helps catch people who are seeking to evade tax, it is to be applauded. But it’s not simple, and there are serious risks and problems if the program isn’t carefully designed.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andrew Parkes is national technical director with Andersen LLP and a tax specialist who worked at a senior level in HMRC’s international teams.

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