The allegation of tax fraud was understandably frightening and unexpected. Our client was aware that her tax affairs had slipped into arrears, but she was liaising with the family accountant in an attempt to get the outstanding tax returns submitted; this was a slow process given her husband held much of the necessary financial information regarding miscellaneous income and became disinterested in helping her. She therefore appointed our Tax Resolutions experts to represent her in dealings with HMRC.
Our client’s lack of knowledge about her husband’s finances led her to appoint Forensic Accountants to review her husband’s financial situation to establish what assets and liabilities ought to be considered in the divorce settlement.
When it became apparent how much tax, interest and penalty HMRC were claiming, our client had real concerns that this might bankrupt her. She therefore spoke with our Restructuring and Insolvency specialists to understand exactly what insolvency would mean. This enabled her to make informed decisions about her future and the possible contingencies which needed to be planned for.
Case study: Divorce
No-fault divorce proceedings were introduced to simplify the process and reduce costs for both parties. However, not all cases are straightforward; heightened emotions frequently unearth unusual problems and can lead to significant disagreements. Such issues may have been known to one or both parties, but caused minimal concern until the relationship began to sour.
Our case study highlights the importance of seeking specialist advice when it is needed which can prove to be extremely beneficial.
Background
Our client consulted with us because she received a letter from HMRC’s Fraud Investigation Service. The letter invited her to enter into the Contractual Disclosure Facility (CDF) to correct her (alleged) historic tax fraud. By admitting tax fraud, HMRC would agree not to launch a criminal investigation or prosecute her for the fraud, assuming she made a full disclosure and paid the appropriate amount of tax, interest and penalty.
When meeting our client we established that she was in the process of divorcing her husband. Her estranged husband was an entrepreneur who had a diverse range of business interests pursued with varying degrees of success, although our client had minimal information because she was the homebuilder throughout the marriage with no involvement in running the husband’s businesses. She also relied on her husband to deal with all financial matters, so she did not know where to start when she was contacted by HMRC.
Work undertaken Insolvency
Work undertaken
Forensics
Work undertaken
Tax investigation
Why was advice needed?
Our client was horrified to discover that her husband had used her as a ‘cover’ for his numerous business interests. One entity under the control of her husband had disposed of a property several years beforehand, resulting in a £1 million profit that had never been taxed. Our client was adamant she had nothing to do with this venture. Further investigation suggested she had signed some of the pertinent property documents.
We reviewed all the detail with our client and learned that her estranged husband had become accustomed to forging her signature on business documents. He was being pursued by people to whom he owed money, hence the pretence and need to mask the true extent of his own business interests.
Given the circumstances, we advised our client that she should deny committing tax fraud as she clearly was not party to any of the irregularities. Acceptance of the CDF offer would mean application of extended time limits (HMRC could look back up to 20 tax years), increased tax geared penalties (35% to 100%) and the potential for the issue to become public by being ‘named and shamed’ by HMRC. As an aside, the CDF is an excellent mechanism for individuals who have actually committed tax fraud, but it is not something that ought to be entered into simply for convenience.
We advised HMRC we would help them to understand the situation and disclose any tax liabilities which might be owed by our client. Enabling us to steer the process and present the case in the way we thought most appropriate, rather than be on the back foot by reacting to questions posed by HMRC investigators.
We conducted our review based on the available records, using information produced by our Forensics team in support of our commentary on the tax position. We then prepared a short report outlining the extent of the tax and interest we believed to be payable.
Strong focus was placed on our contention that none of the profit on the property transaction ought to be taxed on our client. Given the amount at stake, HMRC strongly resisted this point for some time. We therefore gathered witness evidence stating that our client’s signature had been forged on several documents and confirming that the ex-husband was the real face of each business.
HMRC ultimately agreed to vacate the tax assessments issued to our client.
The forensic exercise was to examine the records that were available in respect of the businesses, and the husband and wife, to identify as far as possible the ultimate beneficiaries of the flows of funds arising (such as the proceeds of the property referred to above).
The forensic report was then used both to assist in the negotiations with HMRC but also as the platform to identify the completeness of the husband’s assets to be included within the divorce proceedings.
It is frequently the case in such circumstances that the transactions and structures are deliberately designed to be complex and difficult to penetrate. In one case, the husband stated to his wife that he was going to create such a complex web she would never get to the bottom of it. This phrase was repeated in evidence by the wife to the Court and led to the Court taking significant steps to achieve what it considered to be a fair outcome.
The prospect of bankruptcy proceedings in this scenario was particularly daunting for our client. She was previously unaware of the claim being made against her and the business dealings under which the claims arose. There was also potential for further unknown claims being made by HMRC and other parties.
At the time of our advice there was a real risk of HMRC issuing a petition for our client’s bankruptcy. Had a petition been filed in Court, there would have been a need to incur substantial legal costs to defend our client’s position (so as to prevent a bankruptcy order being made) and to seek an adjournment of the bankruptcy hearing or a withdrawal of the petition.
Had a bankruptcy order been made, the assets of our client would have automatically vested in the bankruptcy estate and therefore she would have lost direct control of her assets. The appointed trustee would have had a duty to sell her interests in both solely and jointly owned assets, including the former marital home in which our client and her children lived. The proceeds of sale would have been made available to creditors, including HMRC, arising from the fraudulent activities of the husband.
This matter was complicated further by the divorce proceedings, claims to assets being made by both parties and assertions that assets had been hidden by our client’s estranged husband.
Our insolvency experts advised our client to take all steps to co-operate with the investigations of HMRC. It was acknowledged that not all of the assets could be protected and that the jointly owned marital home would most likely need to be sold to deal with any proven claims against the husband. The advice focussed on our client protecting her interests and those of her children so that she retained enough money to purchase a new home, separating her affairs from those of her husband.
While a range of issues regularly arise during a divorce (including tax), for example when considering the division of assets. more serious issues are sometimes revealed such as hidden assets or past income and gains not reported to HMRC.
Such discoveries require specialist expertise. It is surprising how often issues of this kind do emerge and they are not easily resolved.
However, with the right specialist support, it is possible to turn around even the most serious of situations and secure a significantly improved outcome.
Conclusion
Explore our insight: Divorce: an international affair
