Revenue audits stamp firmly on tax evasion

REVENUE audit is a success story. Introduced as a component of the new self assessment tax system in 1988, it has achieved remarkable results. Some 4,000 audits yielded more than £100 million in unpaid tax and penalties in 1994, the latest year for which figures are available.

The likelihood of being caught through a Revenue audit has also ensured an increased level of compliance. In a twist to the story, Murray Consultants were the public relations advisers to the Revenue, Commissioners on the introduction of self assessment.

It is not known if the settlement, described as being with Leriona Shipping Line SA, a Panama based company, arose from a Revenue audit, but it probably did. The settlement of £1 million was made in 1992 and related to liabilities for 12 years leading up to 1990.

Just over a year later, under the 1993 tax amnesty, the matter could probably have been settled for about £60,000.

A settlement of £1 million suggests, although this is speculative, unpaid tax of £400,000 to £500,000. Revenue settlements of this nature are commonly 22 1/2 times the unpaid tax, although it should be stressed there are no guidelines as such.

Interest is not usually negotiable, but it seems that the frankness and co operation of the taxpayer may influence the level of penalties. There are particularly punitive pen rallies if an errant taxpayer could have availed of the 1993 amnesty but did not do so.

Occasionally circumstances arise where there is a degree of doubt as to the amount of tax properly due.

This could happen, among other reasons, because of ambiguities in the law, a lack of documentation to back up circumstantial evidence of tax evasion or because of possible - different ways of interpreting the transactions in question.

What can then arise is a negotiated "all in" settlement, between the Revenue and the taxpayer, without any formal breakdown as between tax and related interest and penalties. Noting that there is no such breakdown in the published Leriona settlement, an "all in" settlement may have been agreed.

Since 1983 a tax default settlement of more than £10,000 will result in the ignominy of publication in the annual list of tax evaders. Publication has proved a serious embarrassment to many individuals and companies.

If, as has been reported, the Leriona settlement related to the personal tax affairs of three individuals, taxpayers may find it difficult to accept an obscure Panamanian company, Leriona Shipping Line SA, described as engaged in international, consultancy, as being appropriate, publication. Others, whose names were published, will feel particularly aggrieved.

It should be pointed out, however, that the Revenue has discretionary powers and the full facts of the Leriona situation are not known.

Leriona may have been a tax avoidance scheme that was challenged by the Revenue and found not to work. However, the fact that it continued for 12 year's would suggest that, while the foregoing may be true, the Revenue only latterly became aware of its existence.

It is well established in law that taxpayers are entitled to order their affairs as to minimise tax. This refers, of course, to tax avoidance within the law, as opposed to tax evasion outside the law. To some, the distinction might appear quite fine at times.

The inevitable question that arises from the Leriona affair is how widespread is the practice? The answer is probably not at all. Certainly it was, in relative terms, in the 1970s and early 1980s, but determined work by the Revenue has stamped firmly on such practices.

In particular, Section 86 of the Finance Act 1989 is a strong piece of legislation that outlaws structures and/or arrangements with no commercial purpose other than to avoid tax.

It is interesting to note that legislation followed a landmark case, taken by the Revenue Commissioners on a particular tax avoidance scheme. The Revenue also has a huge array of other legislation to, combat avoidance and evasion.

In truth, although many believe otherwise, tax avoidance is almost dead. What is thriving and commonly mistaken as being avoidance, is the tax compliance industry, i.e. steering clients through a maze of complexity. The tax laws and related documentation, piled one, on the other, would be higher than a desk. Each year another 200 pages or so are added. It has become unstoppable.

The tax adviser is now the linchpin in almost every business transaction outside the normal buying and selling of goods and services. Penalties and interest are costly traps for the unwary.

There should be no rush to judgment. No new laws are needed because of the Leriona affair. The actions of the few are not representative of the many.