United Kingdom
Alan Rajah
by Alan Rajah
Tax evasion occurs when a person deliberately avoids paying tax by failing to declare income, underreports earnings, inflates expenses, or hides assets. This is different from tax avoidance, which involves legally minimising tax liabilities. As tax evasion is treated as intentional dishonesty, it is classified as a criminal offence.
The penalties in the United Kingdom depend on the severity of the offence and may include:
Financial penalties: Penalties can reach up to 200% of the unpaid tax, particularly in cases involving offshore assets or income.
Interest charges: His Majesty’s Revenue & Customs (HMRC) applies interest on unpaid tax from the date it was due until full payment is made.
Criminal prosecution: Serious cases can lead to prison sentences of up to seven years and asset confiscation.
Public naming and shaming: If a person evades more than GBP 25,000 in tax, HMRC may publish their details as a deliberate tax defaulter.
The risks of detection are high as HMRC has access to vast amounts of financial data and sophisticated tools to identify discrepancies.
How do UK tax authorities detect tax evasion?
HMRC uses an advanced AI system called Connect, which cross-references data from multiple sources to detect potential tax evasion. This includes bank and financial records, property transactions, employer payroll data, and even social media activity that suggests a lifestyle inconsistent with reported income.
HMRC has agreements with over 100 jurisdictions through the Common Reporting Standard (CRS), which provides automatic access to offshore bank accounts, investments, and income belonging to UK residents. This makes it increasingly difficult to hide income abroad.
HMRC encourages people to report suspected tax evasion via its Tax Evasion Hotline. Employees, former spouses, business associates, and even neighbours have provided information leading to investigations. Whistleblowers may receive financial rewards for doing so.
Why it’s better to disclose voluntarily than be found out by HMRC
If HMRC discovers tax evasion first, penalties are significantly higher, and there is a greater risk of prosecution. However, voluntarily disclosing undeclared income before HMRC initiates an investigation can lead to:
Lower penalties: Typically between 0% and 30% of the unpaid tax, instead of up to 200%.
Avoidance of criminal prosecution in most cases.
A private resolution rather than the risk of public exposure.
Voluntary disclosure is always preferable to HMRC uncovering an issue, as it reduces penalties and lowers the risk of prosecution.
Conditions for voluntary disclosure
To qualify for reduced penalties, a voluntary disclosure must meet the following conditions:
TimingThe disclosure must be made before HMRC contacts the taxpayer about a possible investigation. If HMRC has already opened an enquiry, voluntary disclosure is no longer available. As such, it is more difficult to appeal to HMRC to reduce any potential penalties that it may charge.
AccuracyThe taxpayer must disclose all undeclared income, gains, and tax liabilities. Any attempt to provide incomplete or misleading information may result in increased penalties or, in some cases, criminal prosecution.
Full payment of chargesAll tax owed must be paid, along with interest on late payments. Penalties are dependent on why the tax was underpaid in the first place:
Careless mistakes: 0% to 30% if disclosed promptly.
Deliberate underpayment: 20% to 70%, but this could be higher if HMRC had to investigate.
Offshore tax evasion: Penalties can be between 100% to 200% if the disclosure is not made voluntarily.
When is voluntary disclosure no longer possible?
Once HMRC has started an investigation or issued an enquiry letter, voluntary disclosure is no longer an option. At this stage, penalties are higher, and prosecution becomes more likely. If the evasion relates to fraudulent tax schemes under active HMRC investigation, voluntary disclosure may not provide immunity from prosecution.
Key areas where voluntary disclosure is crucial
Voluntary disclosure is particularly important in areas where people frequently underreport or omit income.
One of the most significant areas is offshore income. Many UK tax residents receive foreign earnings or dividends and mistakenly believe these do not need to be declared in the UK, especially if tax has already been paid abroad. However, the UK operates on a worldwide taxation basis, meaning UK residents must declare all income, regardless of where it is earned.
Rental property income is another common issue. Many landlords, particularly those with overseas properties or short-term lets through platforms such as Airbnb, fail to declare rental earnings correctly. HMRC has been targeting undeclared rental income aggressively in recent years.
Finally, the rise of cryptoassets and digital earnings has led to increased scrutiny by HMRC. Many individuals assume profits from cryptocurrencies or online trading do not need to be declared, when in reality, they fall under UK tax laws and must be reported.
Common tax evasion mistakes made by foreigners
Many foreign nationals unintentionally commit tax evasion due to misunderstandings of UK tax laws.
One common mistake is assumingforeign income does not need to be declared. UK tax residents must declare their worldwide income, even if it has already been taxed abroad. While the UK has double taxation agreements (DTAs) with many countries to prevent double taxation, this does not mean foreign income is exempt from UK tax. Individuals may be eligible for foreign tax credits, but they still need to report their income.
A similar misunderstanding occurs with overseas capital gains. Many people wrongly believe that if no capital gains tax (CGT) is paid in the country where the asset is sold, then none is due in the UK. However, UK tax residents must declare all capital gains, including those relating to overseas property sales.
An individual’s tax residency status is determined by the UK Statutory Residence Test (SRT), which assesses factors such as time spent in the UK, personal and economic ties, and overall circumstances. Misinterpreting or deliberately misrepresenting residency status, such as reporting that you are tax resident in a more favourable tax jurisdiction, can lead to significant tax liabilities, penalties, and potential legal consequences.
Advice for those who have committed tax evasion
If an individual has undeclared income, they should act quickly. The sooner they disclose, the lower the penalties. HMRC offers disclosure facilities such as the Digital Disclosure Service (DDS) for UK tax issues, and the Worldwide Disclosure Facility (WDF) for offshore matters.
Seeking professional advice is highly recommended, as tax specialists can help navigate the disclosure process and ensure full compliance. Cooperation and complete honesty are crucial – deliberately omitting information can make matters worse. Delaying action can lead to higher penalties and increased scrutiny from HMRC. Consulting a tax specialist early ensures a smoother disclosure process and a better outcome.
If HMRC accepts a voluntary disclosure, criminal prosecution is usually avoided, unless the case involves serious fraud.
Conclusion
HMRC is becoming increasingly sophisticated in detecting tax evasion, using AI-driven systems like Connect and international data-sharing agreements. The consequences of being caught are severe, but voluntary disclosure offers a chance to correct past mistakes while significantly reducing penalties and avoiding criminal charges. Anyone with undeclared income should take action before HMRC contacts them, as making the first move always results in a more favourable outcome.
GGI member firmLawrence Grant LLP, Chartered AccountantsLondon, UKT: +44 20 8861 7575
Advisory, Auditing and Accounting, Fiduciary & Estate Planning, and Tax
Lawrence Grant LLP, Chartered Accountants provides audit, accounting, tax, business advisory, and cross-border tax advice. The firm is focused on providing business solutions to clients to enable them to grow their business in the UK and overseas. In an era of digital transformation, the firm offers a selection of cloud and digital software solutions using AI technology.
Alan Rajah joined Lawrence Grant LLP in 1994 and he is involved in all areas of general practice, specialising in cross-border tax planning, due diligence, mergers and acquisitions, and inheritance tax planning. His client portfolio includes UK and overseas companies and individuals. Alan is the Global Vice Chair of the GGI International Taxation Practice Group (ITPG). Contact Alan.
