HMRC’s Seizure of Crypto Assets Likely the First of Many – Andrew Park
In light of the news that HMRC has seized NFTs from people under investigation for VAT fraud, Tax Investigations Partner, Andrew Park, explains that wilfully uncooperative taxpayers with undisclosed crypto investments face a “rude awakening”, in Solicitors Journal.
Andrew’s article was published in Solicitors Journal, 1 April 2022, and can be found here.
The seizure of assets by HMRC is not new. HMRC’s latest annual report for 2020/21 shows in that year alone it seized £218.4m in assets. However, HMRC’s latest announcement that it has seized “non-fungible tokens” (“NFTs”) from three people it has under criminal investigation for organised VAT fraud is a landmark event. This is believed to be the first time that HMRC or any UK law enforcement body has seized any form of crypto assets.
Crypto assets have been a major HMRC concern for several years now amid concern that they have been used to store the proceeds of tax evasion or to generate huge undisclosed tax liabilities in their own right.
Many UK investors have failed to appreciate – often wilfully – that every disposal of a crypto asset – whether sold for conventional 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. Some investors have inevitably made huge capital gains.
Global partners have been equally concerned and have been working in close partnership with HMRC for a number of years to “crack” crypto. The “J5” initiative which HMRC initiated with the US Internal Revenue Service in 2018 has a special Cyber Tax Crime unit which pools information on the holders of crypto assets and crypto transactions – much of it gleaned from serving bulk information notices on crypto exchanges such as Coinbase in the UK, US and elsewhere.
Meanwhile, HMRC was among a handful of UK government agencies which acquired new civil powers to seize assets in January 2018 when the Criminal Finance Act 2017 took effect. The initial driver for the new legislation was to crack down on people involved in overseas corruption. However, the scope is broad enough to enable Unexplained Wealth Orders (“UWOs”) against any party where there is reasonable grounds to suspect serious crime – including tax evasion – and the party concerned cannot provide an adequate explanation or evidence of how the assets in question (which must be worth more than £50,000) were legitimately acquired. The orders must be granted by application to the UK High Court but they need not be pursuant to a successful criminal prosecution, require only a civil standard of proof and can be sought without giving the targeted individuals any prior notice that the application is going to be heard in court. This means that the court decides whether to grant the order without the property owner themselves having the opportunity to make representations and they can only seek to challenge and overturn after the event.
The first reported use of HMRC’s new civil seizure powers 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 at it was publicly auctioned in September 2020.
To date, although a regular user of criminal seizure powers, HMRC has used its civil seizure powers so sparingly in dealing with tax evasion – that, notwithstanding initial reported use in 2018 and apparent use with regard to the NFTs, there has been recent confusion over whether they have been used by HMRC at all.
Much of HMRC’s apparent reluctance to apply to the High Court for UWOs appears to relate to the potential legal costs for the taxpayer of failed applications – something which is shortly to be addressed with fee capping in the forthcoming Economic Crime (Transparency and Enforcement) Bill 2022.
The “Economic Crime Bill” is now coming in ahead of schedule as part of a wave of measures to counter Russia’s invasion of Ukraine and the some £100bn of illicit Russian, Belarussian and other money said to have been laundered through London every year. Crypto assets are also now even more sharply in focus as the financial noose tightens on associates of the Russian regime and they inevitably seek to use them to bypass sanctions.
Between what was happening already with mounting concern over the crypto tax gap, better intelligence on crypto assets, refinements to the asset seizure regime and what is likely to be overwhelming pressure to regulate and track crypto assets in light of the Ukraine emergency, wilfully uncooperative UK taxpayers with undisclosed crypto investments face a rude awakening.