Managing an HMRC dawn raid
Adam Craggs and Michelle Sloane of RPC LL consider the main criminal powers available to HMRC and how to manage a ‘dawn raid’
HMRC has been under pressure from politicians for some time to increase criminal prosecutions for tax evasion. In September 2010, the Chief Secretary to the Treasury pledged to make funding available to HMRC for a five-fold increase in criminal prosecutions for tax evasion. Perhaps not surprisingly, given such targets and the availability of additional funding, HMRC increased the number of ‘dawn raids’ it carried out from 499 in 2010 to 1,563 in 2016. There has also been a dramatic increase in the number of criminal prosecutions for tax evasion from 430 in 2010 to 1,258 in 2015. Following claims that HMRC have increased their hit-rate by targeting ‘small time’ offenders, HMRC are under significant pressure to pursue high-profile prosecutions that will attract widespread publicity.
Against this backdrop, it is worth reminding ourselves of the key criminal powers at HMRC’s disposal.
General criminal powers
Criminal investigations are dealt with by HMRC’s Fraud Investigation Service (FIS), although the decision to prosecute rests with the Crown Prosecution Service (CPS). The FIS is responsible for all criminal investigations undertaken by HMRC, where it believes a criminal investigation should be undertaken in relation to tax or duty fraud.
The appropriate charge for tax evasion will depend on the facts and seriousness of the alleged wrongdoing. The CPS has an array of offences at its disposal, which can be deployed when charging taxpayers. The main offences that may be charged include:
- fraud (section 1, Fraud Act 2006);
- false accounting (section 17, Theft Act 1968);
- fraudulent evasion of VAT (section 72(1), Value Added Tax Act 1994 (VATA 1994));
- false statement for VAT purposes (section 72(3), VATA 1994);
- fraudulent evasion of income tax (section 106A, Taxes Management Act 1970;
- improper importation of goods (section 50(1)(a) and (2), Customs and Excise Management Act 1979); and
- the common law offence of ‘cheating the public revenue’.
The sentence following conviction for one of the above offences will depend on several factors, which are set out in the Definitive Guidelines on sentencing. The maximum term of imprisonment for committing an offence under the Fraud Act 2006 is 10 years and for all other statutory offences referred to above the maximum is seven years. A person convicted on cheating the public revenue faces a maximum sentence of life imprisonment.
A criminal investigation will often begin with an unannounced search of premises and seizure of evidence, commonly referred to as a ‘dawn raid’.
HMRC generally execute raids having obtained search warrants from the appropriate court under section 9, Police and Criminal Evidence Act 1984 (PACE).
Under section 8, PACE, on an application by an HMRC officer, a Magistrate or Crown Court can issue a warrant permitting HMRC to enter and search named premises if they have reasonable grounds for believing that both:
- an indictable tax offence has been committed; and
- there is material on the specified premises that is likely to be
(i) of substantial value to the investigation of the offence; and,
(ii) admissible at the trial for the offence.
There is no requirement that the occupier of the premises is under investigation. This means that innocent parties can be, and frequently are, raided, for example, the suspect’s accountant’s premises.
In terms of execution of a search warrant, for obvious reasons, HMRC will turn up at the relevant premises unannounced and they usually commence the search early in the morning, typically at 6am or 7am. Unlike other investigating bodies, such as the Serious Fraud Office, HMRC also has an array of civil powers at its disposal, including a right to visit commercial premises, again unannounced. This can make it difficult to establish, in the heat of the moment, what exactly HMRC has turned up to do and under which powers it is operating. However, it is only where HMRC has obtained a search warrant that it will be able to force entry to the premises.
What should you do?
Businesses should review their raids and critical incident procedures, in order to ensure that the right escalation procedures are in place if HMRC officers appear at reception without warning. It is important that businesses are prepared and have in place a robust policy to ensure that, should HMRC arrive unexpectedly brandishing a search warrant, they are in a position to manage the situation effectively. A brief checklist is set out in Box 1 at the foot of this article.
When a business premises is raided, an HMRC officer may seize and retain anything for which a search has been authorised under section 8, PACE. It is important that HMRC is monitored during the raid to ensure they are not seizing material that is outside the scope of the warrant. HMRC officers can remove material (for example, computer hard drives) if they have reasonable grounds to believe that the material contains items they are authorised to seize.
HMRC officers also have the power of arrest and often exercise this power. Once arrested, a person can be taken into custody for an interview ‘under caution’. The caution involves reading the suspect their rights and the interview will be recorded.
A key issue that will require careful consideration when HMRC is executing a search warrant is legal professional privilege. HMRC is not permitted to examine or seize any material to which legal professional privilege attaches. In larger raids, HMRC officers are often accompanied by independent counsel whose role is to consider issues of privilege.
There are two types of legal professional privilege:
- Legal advice privilege
This covers confidential communications between a lawyer and his client in the context of seeking, or giving, legal advice.
- Litigation privilege
This covers confidential communications between a lawyer and his client, or the lawyer or client and a third party, such as an accountant or tax adviser, that come into existence for the dominant purpose of being used in connection with actual or pending litigation, for example, a tax appeal to the First-tier (Tax Chamber) Tribunal.
As most lawyer/client communications will attract legal advice privilege, communications between the taxpayer and his lawyers will not need to be disclosed to HMRC. There are, however, some difficult areas that may need to be addressed on the day of a raid, for example, the status of internal emails or communications with non-lawyer professional advisers, such as accountants and/or tax advisers.
Communications with other professional advisers will not attract legal advice privilege, even if these professionals are giving advice on legal matters. If there is a dispute over whether a document is subject to legal professional privilege, it should be separately bagged by HMRC in a ‘blue bag’ for later review with independent counsel.
Challenging an HMRC search warrant
It is important to remember that the legality of the decision granting and execution of a search warrant can be challenged by way of judicial review proceedings in the High Court. Issues to consider are whether HMRC and the Court which granted the warrant complied with the statutory scheme contained in PACE and Part 47, Criminal Procedure Rules 2016 (as amended), authorising applications to be made and granted and whether the terms of the warrant were proportionate.
In R (oao Mercury Tax Group) v HMRC  EWHC 2721 (Admin), it was held that the warrant in that case was issued unlawfully as HMRC had not put its case with ‘scrupulous accuracy’ and in such a way as to enable a fair assessment of the grounds for the suspicion of fraud.
It should be noted that a practical obstacle to ultimate success when challenging a search warrant by way of judicial review proceedings is presented by section 59, Criminal Justice and Police Act 2001 (CJPA). This section provides a statutory remedy to agencies, such as HMRC, by which the Crown Court may permit them to retain material seized under a warrant that was found to be unlawful, notwithstanding that such material has been unlawfully seized.
Given the current political pressure on HMRC to increase the number of significant criminal prosecutions for tax evasion, the number of dawn raids and criminal prosecutions for tax evasion is likely to continue to increase for the foreseeable future and individuals and businesses need to ensure that they are prepared and have in place robust systems should they be unfortunate enough to receive ‘the knock’.
Adam Craggs is a partner and head of the tax disputes resolution team at RPC. He can be contacted on 020 3060 6421 or by email: firstname.lastname@example.org.
Michelle Sloane is a senior associate in the team. She can be contacted on 020 3060 6555 or by email: email@example.com.
- Below are some practical points to note when HMRC executes a search warrant:
- Request the names of the HMRC officers in attendance.
- Ask the HMRC officers to show you the warrant or authorisation and make a copy.
- Request that the HMRC officers wait in a conference room, away from public view.
– On arrival, a manager or senior member of the organisation should examine the warrant or authorisation and check, in particular: the name of the persons who are the subject of the investigation;
– the address to which the warrant or authorisation relates;
– he date of issue of the warrant or authorisation and any expiry date;
– the judicial authority under which the warrant or authorisation has been issued; and
– whether there are any stated reasons for authorising the search.
- The manager or senior member of the organisation should request that the search is not commenced until solicitors have arrived on site.
- Do not obstruct the HMRC officers if they insist on beginning their search.
- Accompany the HMRC officers at all times while on the premises and do not leave them unattended.
- Take a note of progress of the search.
- Examine IT systems with solicitors and IT staff in attendance.
- After the search, you should be supplied with a copy of any HMRC records of material seized and sealed in bags for removal.
- Do not destroy, hide or tamper with any material.
- It may not be appropriate to volunteer information to HMRC or answer HMRC questions until you have had an opportunity to consult with your solicitors.
- Carefully consider the privileged status of any material with your solicitors.