Nowhere to Run, Nowhere to Hide – HMRC Starts Confiscating Crypto – Andrew Park
In light of the news that HMRC has seized three NFTs from people suspected of organised tax evasion, Andrew Park, Tax Investigations Partner, examines the inroads the UK taxman is now making into tracking and cataloguing crypto transactions, in IFA Magazine.
Andrew’s article was published in IFA Magazine, 2 March 2022, and can be found here.
Simon York – head of HM Revenue & Customs Fraud Investigation Service – did not put it quite like Martha and the Vandellas when he spoke at one of the latest crypto conferences. However, the message was pretty clear and pretty stark. Commenting on HMRC’s first seizure of crypto assets from three people under criminal investigation for VAT fraud, he was at pains to emphasise the inroads the UK taxman is now making into tracking and cataloguing crypto transactions – “when you’re filling out tax documentation, we know half the answers already,” he said.
In the UK and so many other jurisdictions like the US, crypto assets – even so-called “cryptocurrencies” like Bitcoin – are treated for tax purposes as investment assets. Every disposal, whether for conventional currency, in exchange for other cryptoassets, or to pay for goods and services is a potential taxable event – something which many enthusiastic early investors have often overlooked deliberately or through failing to seek professional advice for fear of what they might be told.
All of this is a far cry from the anonymous world so many UK crypto investors still thought they were in even six months ago – before, that is, mysterious “nudge” letters started dropping on their doormats from HMRC informing them that HMRC knew they had sold crypto investments, “educating” them on what the Capital Gains Tax consequences might be for them and inviting them to contact HMRC to come clean should they need to.
In large part this comes from HMRC’s ever closer working relationship with the US’s Internal Revenue Service (“IRS”). Although HMRC and the IRS have had treaty authorisation to exchange information for three quarters of a century it was until quite recently pretty disorganised and sporadic. No longer. When in 2018 HMRC and the IRS founded the multinational Joint Chiefs of Global Tax Enforcement (“J5”) initiative the chief concern from day 1 was their ongoing battle to get to grips with crypto assets. Crypto assets were being used not just to launder the general proceeds of crime but were giving rise – and continue to give rise – to huge levels of tax evasion in their own right as booming investment activity in crypto and the huge gains made by multitudes of investors have failed to materialise on their tax returns.
As often when faced with what seems like a complex problem, a big part of the solution has turned out to be remarkably simple. HMRC, IRS and other counterparts have used old-fashioned information powers to serve bulk data notices on major crypto exchanges within their jurisdictions and then pooled the information internationally. Coinbase UK, for instance, was served with a notice from HMRC requiring IT to disclose details of all customers receiving more than £5,000 of crypto assets in their accounts during the tax year to 5 April 2020. This followed what the IRS had already done in successfully obtaining an order against Coinbase in the US to surrender details of all users who had transactions of at least $20,000 per annum between 2013 and 2015 – years in which it transpired thousands of users had transacted at or above that level but only hundreds had reported taxable gains on their tax returns.
In the normal course of things and as a tax collection agency, HMRC generally investigates even most cases of suspected tax evasion as civil rather than criminal matters, raises civil discovery assessments of the tax found to be outstanding 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 select minority of cases. HMRC’s latest annual report for 2020/21 shows that in that year alone it seized £218.4m in assets.
Whilst it is unsurprising that HMRC can seize assets off people criminally convicted of tax evasion, its civil seizure powers – which can be exercised just based on suspicion and seem to have been used in the latest seizure of crypto assets whilst the criminal investigation is still ongoing – are still little known. HMRC was amongst a handful of UK government agencies to acquire new civil powers to seize assets upon the Criminal Finance Act 2017 which took effect in January 2018. Although initially aimed at the unexplained wealth of international people laundering or enjoying the ill-gotten proceeds of overseas corruption in the UK the scope is broad and encompasses situations where assets worth £50,000 or more are suspected to originated from serious crime – including tax evasion.
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 at it was publicly auctioned in September 2020.
Initial fears that HMRC might try to use UWOs – or the threat of them – to bully taxpayers in the course of routine investigations have proven unfounded. Indeed, whilst the National Crime Agency has made headlines pursuing PEPs, HMRC has used UWOs so sparingly in dealing with tax evasion that, notwithstanding initial reported use in 2018, 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 be related 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, of course, now being rushed through more quickly as part of a blizzard of UK and international measures to address Russia’s invasion of Ukraine and the some £100bn of illicit Russian, Belarussian and other money said to be laundered through London every year – increasingly using crypto assets.
UWOs have an obvious application where HMRC receives information that UK residents hold valuable crypto assets – the provenance of which cannot be determined after passing through multiple exchanges and “wallets” – and which bear no correlation with the income and gains revealed on tax returns. In those circumstances, it is also likely that investigations may get bogged down as even cooperative taxpayers who come under investigation – let alone the uncooperative ones – will struggle to reconstruct a convincing audit trail.
So it seems we now have a confluence of factors, all of which point to a likely surge in the use of UWOs by HMRC to seize cryptoassets:
- a vastly improved intelligence picture of which UK residents hold and transact large amounts in crypto;
- no apparent correlation between the level of taxable gains many early crypto adopters have realised and what has been reported on their tax returns;
- an often lack of proper record keeping – wilful or otherwise – which may make adequate explanations of crypto wealth or evidencing difficult;
- an international crisis that is throwing unexplained wealth into focus like never before and forcing an acceleration of UK countermeasures – including changes to the cost regime that will make UWO applications to the High Court much cheaper for the authorities.
Where recovery of any unpaid tax is concerned and depending on the circumstances and relevant “behaviours”, HMRC can go back up to 20 years – many years before the birth even of Bitcoin. The best course of action for anyone who has been significantly involved in crypto and who might have outstanding tax issues is to urgently seek professional advice with a view to making an unprompted voluntary disclosure. They then stand to get a more sympathetic and maybe more open-minded hearing from HMRC and can engage in a process where some of HMRC’s more extreme measures like UWOs will never be even remotely at point.