A look into HMRC's toolbox during a criminal investigation

HMRC has far-reaching powers it can deploy during a criminal investigation into suspected tax fraud, which include applying for and executing search warrants (colloquially referred to as a "dawn raid"), making arrests and the compulsorily obtaining of information and documentation through production orders and disclosure notices/orders. Failing to properly respond to an HMRC criminal investigation can have serious repercussions, including significant financial and reputational damage, or even prison time for individuals.

This blog is based on an article which was first published in Tax Journal on 9 February 2024. That article can be accessed here: https://www.taxjournal.com/articles/a-look-into-hmrc-s-toolbox-during-a-criminal-investigation

Introduction

HMRC has an array of far-reaching powers at its disposal which it can utilise when conducting criminal investigations. These powers include, applying for and executing search warrants, the arrest of individuals, obtaining documents and information through production orders, disclosure notices/orders, or even as a consequence of covert surveillance. This blog explores these powers, what they enable HMRC to obtain during a criminal investigation and the important practical steps and considerations to bear in mind when responding to such an investigation.    

We set out at the end of this blog a step-by-step guide on how to manage a dawn raid.

RPC has also developed 'RPC Raid Response' which is an app toolkit featuring all the guidance you need to successfully navigate a dawn raid. It also has a live report incident button which connects you to RPC's specialist lawyers.  The app is free to download from Apple Store and Google Play. 

Search warrants

When HMRC suspects tax fraud, it may apply for and then execute a search warrant, pursuant to section 8, Police and Criminal Evidence Act 1984 (PACE).  The execution of such warrants are often referred to as 'dawn raids', as they are usually carried out early in the morning at the start of the business day. Raids are unannounced and are carried out in order to prevent evidence from being destroyed. They are used in circumstances where HMRC is of the view that if it were to request the information it is likely to be destroyed. 

In order to obtain a warrant, HMRC must satisfy a Magistrates Court that there are reasonable grounds to believe that: 

• an indictable offence has been committed; 
• there is material on the premises which is likely to be of substantial value to the investigation of the offence; 
• the material is likely to be relevant evidence (i.e. evidence which is admissible in evidence at a trial for the offence); and
• the material does not consist of or include items subject to legal privilege, excluded material or special procedure material.

One of the following conditions must also be satisfied:

• it is not practicable to communicate with any person entitled to grant entry to the premises;
• it is practicable to communicate with a person entitled to grant entry to the premises but it is not practicable to communicate with any person entitled to grant access to the evidence;
• entry to the premises will not be granted unless a warrant is produced; or
• the purpose of a search may be frustrated or seriously prejudiced unless a constable arriving at the premises can secure immediate entry to them.

The warrant should specify which premises are to be searched, the material that is sought and whether it has to be executed in a single visit.  The majority of search warrants granted to HMRC authorise a single visit.  HMRC can use reasonable force to enter premises if they are not provided with access (section 16, Police and Criminal Evidence Act 1984) (Application to Revenue and Customs) Order 2015). 

During a raid, HMRC can seize any material to which the warrant relates.  HMRC does not have the power to examine or seize materials subject to legal professional privilege (LPP). This is material that is subject to either legal advice privilege i.e., communications between a lawyer and client in the context of seeking or giving legal advice, or litigation privilege i.e., communications between a lawyer and client and/or third party for the dominant purpose of being used in communication with actual or pending litigation.  

If it is not practical to separate material within the scope of the warrant and/or material which is subject to LPP, HMRC have the power to remove the material in order for that exercise to be carried out at a later date (section 50, Criminal Justice and Police Act 2001). HMRC often uses this power in respect of computer hard drives/servers with the entirety of the hard drive or server copied or removed for sifting at a later date.  It may take considerable time, ranging from several weeks to many months, for HMRC to filter for privileged and irrelevant documents.  This process needs to be carefully monitored with strict parameters agreed and set at the outset.  HMRC officers, independent of the case team, should be involved, along with independent counsel. 

Further powers to obtain information during a criminal investigation

Production orders

HMRC can apply to a circuit judge for a production order under section 9 and Schedule 1,  PACE. A production order compels a person, who appears to be in possession of material to which the order relates, to produce this material to HMRC. 

The following requirements must be met in order for a judge to grant a production order under PACE: 

• an indictable offence has been committed;
• there is material acquired or created in the course of business and held subject to an express or implied undertaking to hold it in confidence, or under an obligation of secrecy, on the premises of the subject of the application;
• the material is likely to be of substantial value to the investigation;
• other methods of obtaining the information have not succeeded or have not been tried because they appeared bound to fail; and
• having regard to the benefit to the investigation and the circumstances under which the material is held, it is in the public interest that the material should be produced.

HMRC may also apply for a production order under section 345, Proceeds of Crime Act 2002 (POCA). The following requirements must be met in order for a judge to grant a production order under POCA:

• a specified person is subject to a confiscation investigation, civil recovery investigation, exploitation proceeds investigation, money laundering investigation or specified property is subject to a civil recovery investigation, a detained cash investigation, a detained property investigation or a frozen funds investigation;
• there are reasonable grounds for suspecting that the criteria are met in respect of the relevant investigation type;
• there are reasonable grounds for believing that the material sought is likely to be of substantial value (whether by itself or together with other material) to the investigation;
• there are reasonable grounds for believing that the material sought is in the possession or control of the person specified in the application; and
• having regard to the benefit to the investigation and the circumstances under which the material is held, it is in the public interest that the material should be produced.

Disclosure orders/notices

HMRC is also able to seek a disclosure notice under section 62, Serious Organised Crime and Police Act 2005 (SOCPA). Such a notice can require records of information to be created (whether or not the information is contained in a document). For example, the information may only exist in someone's mind. 

Under section 62 , the Director of Public Prosecutions, or delegated Crown Prosecutor, may issue a disclosure notice if:  

• there are reasonable grounds to believe that a specified offence has been committed (for HMRC's purposes, this will usually be the offence of cheating the public revenue, or false accounting over £5,000);
• any person has information which relates to a matter relevant to the investigation of that offence; and
• there are reasonable grounds for believing that information which may be provided is likely to be of substantial value to the investigation.

Production orders and disclosure orders/notices must be complied with. Failure to do so can result in the recipient being found in contempt of court, which can be punishable by a fine and/ or imprisonment. If you are a professional advisor and you have been served with a production or disclosure order in respect to an investigation for money laundering or terrorist financing, it may be a criminal offence if you 'tip off' your client and inform them that you have been served with such a notice.  The main professional regulators have issued guidance as to whether advisors need to inform clients about a production or disclosure order and it is important that any such guidance is consulted should you be served with a notice.  

It is also important to remember that complying with such orders does not necessarily entail handing over all documents/information to HMRC. Careful consideration should be given to the scope of the order to ensure that only information within the scope of the order is disclosed to HMRC. As with a dawn raid, these powers do not give HMRC the ability to compel the disclosure of legally privileged material, which can only be given to HMRC if the privilege holder gives their express permission. 

Arrest powers 

HMRC have powers of arrest in relation to tax offences.  Pursuant to section 24(1), PACE, an authorised officer of HMRC may arrest, without a warrant, anyone who:

• is about to commit an offence (section 24(1)(a));
• is in the act of committing an offence (section 24(1)(b));
• they have reasonable grounds for suspecting is about to commit an offence (section 24(1)(c)); or
• they have reasonable grounds for suspecting to be committing an offence (section 24(1)(d)).

HMRC's powers of arrest may only be used if the officer has reasonable grounds for believing that it is necessary to arrest the person in question (section 24(5)). HMRC usually argue that an arrest is necessary as it will allow the prompt and effective investigation of the offence by enabling the suspect to be questioned under caution.  However, if a suspect agrees to attend a voluntary interview under caution, an arrest is not necessary.  Given the repercussions an arrest can have, such as a refusal of a visa to visit the United States, it is important that the necessity for arrest is challenged when it is appropriate to do so.  

Communication data powers

For cases of serious crime, HMRC can also apply to use the intrusive surveillance powers contained in the Investigatory Powers Act 2016, the Regulation of Investigatory Powers Act 2000, and The Police Act 1997.  In order to utilise these powers, HMRC need to be able to demonstrate that covert surveillance is both necessary and proportionate to address an identified risk and the information cannot be obtained in a less intrusive way.  If approved, these powers allow the interception of communications, intrusive personal surveillance, and property interference. Given the intrusive nature of these powers, which interfere with a person's fundamental right to privacy, HMRC generally only apply for authorisation and use these powers in relation to cases involving serious organised crime where significant sums of tax are at stake.  The interception of communications must be approved personally by the Home Secretary and a Judicial Commissioner.  

Summary

As can be seen from the above, HMRC's criminal powers are both swingeing and far-reaching. The consequences of mishandling a criminal investigation can have serious financial and reputational repercussions and can lead to lengthy custodial sentences for individuals. Businesses should have a comprehensive dawn raid policy in place so that they can quickly act if the unimaginable happens and they find themselves the subject of a raid.  In addition, key staff should be trained (including reception and security staff) on how to manage effectively a raid and the specific actions they need to take.  When responding to a dawn raid or production order/disclosure notice, it is important to ensure that HMRC only obtains what it is lawfully entitled to obtain under the warrant, order or notice.  It is necessary to ensure that only material that is within the scope of any warrant, order or notice is provided to HMRC and that you do not provide any legally privileged material.  If you are in any doubt about the scope of HMRC's criminal investigatory powers, you should seek expert legal advice from a lawyer with the appropriate experience in this specialised area.    

What to do during a dawn raid 

When HMRC arrive at the premises the following steps should be taken: 

1. Who – Identify the HMRC officers in attendance and ask whether their team leader will speak to your solicitor on the telephone.

2. What – A copy of the search warrant should be presented at the start of the raid. If it is not, it is important to request a copy. The search warrant contains critical information about the powers of the HMRC team and the scope of the search. Immediately send a copy of the warrant to your solicitor. If the scope of the warrant appears to be too wide, your solicitor may find grounds to challenge the warrant. 

3. How – Discuss and understand how the HMRC team intend to conduct the search i.e., what are they looking for and how do they plan to find it.

4. When – Ask that the search is not commenced until your solicitor arrives at the premises, although HMRC is entitled to refuse this request. The search warrant may provide a limited time for the HMRC officers to carry out their search and so they may not wish to delay. If HMRC officers insist on beginning their search it is important not to physically obstruct them. However, you should state that in commencing the search without your solicitor being present that they are ignoring your reasonable request. This is particularly true if you have provided a firm timescale for when your solicitor will arrive.   

5. Response – Assemble an internal team to respond to the raid and if practicable allocate one member of staff to 'shadow' each HMRC officer. The purpose of each 'shadow' is to monitor the search undertaken, make a note of all questions asked/answered and take a copy of all documents examined, copied or removed by the HMRC officer they are observing. Shadowers need to ensure HMRC only seize material within the scope of the warrant and do not seize legally privileged material. Other members of the internal team might include your IT representative and administrative support. 

During the search there are several factors to bear in mind: 

6. The HMRC officers are there to examine, copy or remove documents; they are not permitted to interview members of staff. Accordingly, questions posed by HMRC officers should only relate to the location or search of the documents sought. Consult your solicitor if there is any doubt.

7.  It is important not to physically obstruct the HMRC officers whilst they are searching the premises. Members of staff must make no attempt to destroy or conceal documents.

8. The 'shadow' team should monitor the search undertaken by each HMRC officer and the HMRC officers should not search the premises unaccompanied. Members of the shadow team should raise any concerns if it appears that HMRC's search may be going beyond the scope of the warrant, or officers wish to copy or remove legally privileged material. 

9. If HMRC disagree with the classification of a document, it should be placed in a sealed envelope/bag for determination at a later date.

When HMRC has carried out the search, the following steps should be taken: 

10. A copy of any notes taken by the HMRC officers during the raid should be obtained, in addition to copies of any documents that were examined, copied or removed by HMRC.

11. Compile and check the internal team’s notes of the questions asked by HMRC and the responses provided.

12. Ask whether HMRC plan to return to the premises and, if so, agree on the arrangements for any such visit.

After the raid, the following steps should be taken:

13. Review all documents and information seized by HMRC. If it comes to light that any incorrect information has been provided to HMRC, it is important to correct this as soon as possible. 

14. Consider setting up an internal investigation team to audit the relevant area of business. However, refrain from generating unnecessary documents which may be disclosable to HMRC at a later date. If an internal investigation is set up following the raid, ensure that it is appropriately protected by LPP.

15. Following the raid, HMRC is likely to contact and interview relevant third parties. This may include customers and suppliers, and a business may therefore wish to contact them to provide reassurance. 

16. Consideration should be given to appointing a public relations firm to manage any media enquiries.