A Landmark UK Enforcement Case For Crypto-Assets – Andrew Park
Tax Investigations Partner, Andrew Park, discusses HMRC’s announcement that is has seized three NFTs from people suspected of organised tax evasion, in Law360.
Andrew’s article was published in Law360, 30 March 2022, and can be found here.
When HMRC seized so-called “non-fungible tokens” from three people under investigation for VAT fraud a few weeks ago it marked what is understood to be the first seizure of crypto assets by a UK law enforcement agency. It promises to be the first of many – both for HMRC in its investigation of suspected tax fraud and for UK law enforcement generally.
Tracing crypto assets and identifying crypto transactions has been a number one priority for global law enforcement for many years. Analysis recently published by cryptocurrency investigation and transaction monitoring specialists Chainalysis estimates the level of international money laundering involving crypto assets to have been c. $33bn since 2017 and to presently run at c. $8.7bn per annum.
Since 2018 HMRC has been working closely with the US’s Internal Revenue Service (“IRS”) and other international partners as part of the Joint Chiefs of Global Tax Enforcement (“J5”) initiative with their primary concern from day one being to get to grips with crypto assets, their use as a store of the proceeds of tax evasion and the undoubted generation for many people of huge undisclosed taxable gains in their own right. That work is now paying dividends – not least, after collating and pooling information gleaned from the bulk information notices they have served on crypto exchanges in their respective jurisdictions.
Many UK investors have failed to appreciate – often wilfully – that every disposal of a cryptocurrency or other crypto asset – whether sold for conventional government issued “fiat” currency, exchanged for a different form of crypto or used to pay for goods or services – will be treated as crystallising a capital gain or a capital loss. Although there have been losers too, some investors have inevitably made huge capital gains which haven’t found their way onto Self-Assessment tax returns.
Such UK crypto investors got a shock a few months ago when HMRC “nudge letters” started landing on their doormats announcing that HMRC had information they had sold crypto assets, giving them a basic explanation of the UK’s Capital Gains Tax regime and inviting disclosure of anything they might need to put right. Speaking about the new crypto asset seizures and HMRC’s inroads on crypto generally, Simon York – head of HM Revenue & Customs Fraud Investigation Service put it bluntly: “when you’re filling out tax documentation, we know half the answers already”.
In the normal course of things, when HMRC’s suspicions are aroused it generally investigates even most cases of suspected tax evasion as civil rather than criminal matters, raises assessments for whatever tax it is still in time to recover (depending on the “behaviours” it can go back up to 20 years) and then, subject to any appeals, hands recovery of the determined tax debts to its debt collectors – to be pursued, if necessary, like any normal debt. HMRC does not seize assets in the normal course of its work. However, it does have broad-ranging criminal and civil recovery powers and it does use them in a small minority of cases. HMRC’s latest annual report for 2020/21 shows that in that year alone it seized £218.4 in assets – overwhelmingly, if not exclusively, through its criminal powers pursuant to criminal investigations and successful criminal prosecutions.
However, it is HMRC’s more recent civil seizure powers which promise to be of growing utility in addressing matters where UK taxpayers cannot or will not provide an audit trail to explain the build-up of crypto wealth that bears no correlation with their tax returns. HMRC was the recipient together with a handful of UK government agencies of new civil powers to seize assets under the Criminal Finance Act 2017 – which took effect in January 2018. The scope of these powers is broad and encompasses situations where assets worth £50,000 or more are suspected to originate from serious crime – including tax evasion.
So-called Unexplained Wealth Orders (“UWOs”) can be granted upon application to the UK High Court based on reasonable suspicion, alone, of serious crime – as established in a private hearing to a civil standard of proof or else because the individual concerned is a Politically Exposed Person (“PEP”) from outside the EEA. There is no requirement that the targeted individuals be notified in advance and be given the opportunity to contest the granting of an order. They can only seek to challenge or overturn after the event. However, they will fail if they cannot give an adequate explanation or evidence of how the assets in question were legitimately acquired.
The first reported use of HMRC’s new civil powers to seize assets was in November 2018 when it seized eight gold bars – worth an estimated £750,000 – from an outbound passenger at Manchester Airport. The owner was not ultimately prosecuted but failed in efforts to recover the gold and it was publicly auctioned in September 2020.
To date HMRC has used UWOs so sparingly in dealing with tax evasion that, notwithstanding the initial reported use in 2018, there has been recent confusion over whether they have been used by HMRC at all. They have also been little used by other UK law enforcement agencies – which collectively cite the potential legal costs for the public purse of meeting the targeted individual’s costs in failed applications. This is shortly to be addressed with fee capping provisions at clauses 46 and 47 in the forthcoming Economic Crime (Transparency and Enforcement) Bill 2022 – which will ensure that no such costs will be borne unless the applying enforcement authority acted unreasonably, dishonestly or improperly in the proceedings. At the time of writing the “Economic Crime Bill” is being accelerated through Parliament to augment the armoury of measures available to counter associates of the Russian regime – in which regard, crypto assets are a growing cause of concern.
Crypto investors who got lucky by investing early and investing well but who will not or cannot without good reason produce an audit trail to demonstrate how they acquired their digital wealth in a tax compliant way risk a rude awakening. They risk getting caught up in the crossfire between law enforcement and the broader world of serious criminality and the politically compromised. However, it should, of course, never come to that. Tax matters could and should always be pre-emptively addressed by making full voluntary disclosure to HMRC and embarking upon a dialogue to reach a fair and reasonable outcome – even where, perhaps, the early days of crypto being what they were, reasonable assumptions might be required to compensate for a genuine lack of contemporary records. Better to accept the need to lose a portion of a windfall return to pay a tax bill than to try to stonewall HMRC even upon detection and risk forfeiture of the lot.