UK: HOW TAXMAN TRACK THE DODGERS. - Last year the Inland Revenue recovered more than £4.7 billion from moonlighters and artful dodgers. Its tactics owe more to Sherlock Holmes than the traditional taxman.

by Lorna Bourke.
Last Updated: 31 Aug 2010

Last year the Inland Revenue recovered more than £4.7 billion from moonlighters and artful dodgers. Its tactics owe more to Sherlock Holmes than the traditional taxman.

It's the letter everybody dreads. 'I have reason to believe that you have an unreported source of income ...' reads the bombshell from the Inspector of Taxes.

Last year the Inland Revenue rounded up more than £4.7 billion from taxpayers who had mistakenly omitted or underdeclared tax, and from individuals who had deliberately evaded tax - a sum equivalent to more than 2p on the basic rate of income tax.

At the Inland Revenue's central Compliance Investigations Department in London there are over 400 individuals beavering away, and several thousands more around the regions, who do nothing but conduct investigations into taxpayers they think may have a hidden source of income or profit.

They track down moonlighters - from 'ash can' cash payments to doctors certifying cremations, to tour operators' couriers who pocket money taken for refreshments sold on-board coaches. They are hot on reading the small ads in newspapers, rounding up 'ghosts' who are unknown to the Revenue, working in the black economy - from painters and decorators to car-boot dealers.

Their activities have more in common with Sherlock Holmes than the traditional tax inspector. 'A lot of it is cloak-and-dagger detective work,' says David Daly, a former tax inspector and now director of tax investigations at accountants Clark Whitehill.

Avoiding tax is legal - evading tax is not. Putting your money in a Swiss bank account or an offshore trust in the Bahamas, Panama, the Cayman Islands or some other tax haven may make life difficult for the tax investigators. 'There are exchange of information treaties which exist between some countries but there is little co-operation from the traditional tax havens,' says Daly. But don't rely on banking secrecy even here. 'The Revenue will sometimes raid the UK subsidiaries of foreign banks and uncover foreign accounts held by UK residents,' Daly warns.

And in a world where more than one in three marriages ends in divorce, it is hardly surprising that a significant amount of information on tax evasion finds its way to the Revenue through divorcing wives, anxious to flush out foreign accounts and undeclared realisations of assets and profits in order to up the divorce settlement. 'Jilted lovers will often inform on their former partners out of spite,' says Daly. 'Disgruntled neighbours are often Inland Revenue informants, too.' Back in the 1980s, when offshore roll-up funds were popular, many tax dodgers were caught out as they did not realise that their 'deposit' was in fact shares in an investment company. Many of these roll-up funds were quoted on the London Stock Exchange, where the Inland Revenue trawls the share registers of public companies and marries up the names of shareholders with those of taxpayers. They even travel to the Channel Islands to inspect the registers of investment companies that are not quoted in London.

Shares in American companies can be a giveaway. The US Internal Revenue Service regularly sends the Inland Revenue details of foreign owners of shares where withholding tax has not been deducted. 'Most people get caught because they have a bank or building society investment account on which they haven't declared the income,' says Daly.

But the special investigators use some surprising methods to flush out tax dodgers. 'They read local and national newspapers for small ads for flats, houses or holiday homes for rent to check whether the income has been declared,' confirms Daly. They also look at university accommodation lists, letting agencies' lists and anything else they can get their hands on to track down landlords.

'With open government we now have access to the Inland Revenue practice manuals on how they go about special investigations,' says David Rothenburg of accountant Blick Rothenburg. In many instances tax inspectors are on the look-out for conspicuous consumption or a lifestyle which could not be financed out of declared income or profits. 'They have access to the names of all purchasers of special car registration number plates and through contacts with the local authority they monitor planning applications looking for expensive home improvements,' says Rothenburg.

The practice manuals reveal, ironically, that some tax evaders have been caught through cards in shop windows, offering tax and accountancy services. You can run - but you can't hide.

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