Success stories such as Becker’s conviction highlight the need for tough probing of defendants to fully prove, and win, the type of case that benefits all honest taxpayers and protects the integrity of the entire taxation system.
Director Tom Davey discusses the challenges facing Insolvency Practitioners in Bloomberg Tax
In light of recent high profile HMRC cases against sports stars and company directors, Director Tom Davey argues that the role of insolvency practitioners is vital in ensuring a fair business environment.
Tom’s article was published in Bloomberg Tax, 16 June 2023, and can be found here.
The conviction last year of former world number-one tennis player Boris Becker, for hiding millions of pounds of assets and loans in an attempt to evade tax liabilities, was a much-needed shot in the arm for the insolvency industry.
Coming at a time when several high-profile prosecutions had ended in well-publicized failure for the UK Insolvency Service, Becker’s trial was seen as a pivotal test of the UK’s tax laws and the regulators’ ability to take robust enforcement action. His guilty verdict and subsequent two-and-a-half-year jail sentence reminded the public of the heavy consequences of attempting to cheat the UK Exchequer out of tax owed.
When even a sports superstar such as Becker is shown not to be above the law, taxpayers are reassured that they aren’t left footing the bill for others’ illegal actions, and would-be tax evaders are deterred by the unedifying sight of a world champion’s ignominious fall from grace.
The case, and other similar trials featuring company directors and high-net-worth individuals, also placed in the spotlight the many competing interests that have created an “ethical seesaw” of professional obligations for many insolvency practitioners.
While the modus operandi of insolvency practitioners is sometimes perceived as unnecessarily invasive or punitive against individuals or businesses, their practice is essential in upholding a fair business environment, including personal tax obligations. Insolvency practitioners are crucial in ensuring that those who flout the rules are held accountable by being made to pay what they owe, as well as facing sufficiently robust sanctions to avoid repeat occurrences, either by themselves or others.
The full and prompt payment of tax by all members of society is essential to the proper functioning of a tax-based economic system. Those who evade this moral and fiscal responsibility must therefore be held to account, with insolvency practitioners playing a crucial part in ensuring that wrongdoers face justice.
Becker had willfully and painstakingly hidden assets from the UK tax authority, HM Revenue & Customs, including shares in a technology company and a bank loan worth over £1 million ($1.26 million), as well as a share in a property. The judge focused on Becker’s intent to deceive, rejecting pleas for clemency on the basis that he hadn’t been attempting to fund a “lavish lifestyle,” but had spent what money he had on essentials such as child support and rent.
Given Becker’s past conviction for tax evasion in Germany in 2002 that resulted in a suspended sentence, there was reason to believe that unless a sufficiently punitive sentence was handed down in this case, there was every risk that Becker would continue with his deceptive practices in the future.
Following the verdict, the insolvency service was able to note with a degree of triumphalism that the sentence “clearly demonstrates that concealing assets in bankruptcy is a serious offense for which we will prosecute and bring offenders to justice.”
Tax Avoidance Schemes
Another important recent case testing the powers of insolvency service prosecutors involved company directors, professional sport players, and other wealthy individuals trying to avoid paying tax by placing money into employee benefit trust schemes. These are discretionary trusts originally intended to be used to reward employees with profits, shares, or pensions—however, these schemes also have been used as tax avoidance devices.
This practice of tax avoidance was ultimately found by the UK Supreme Court to be illegal in the RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) case. Insolvency practitioners have relied on the decision when pursuing directors who used such schemes to pay themselves tax-free cash. This has resulted in significant financial impairment for those caught carrying out the illegitimate scheme, since the verdict forced them to repay in full to HMRC the tax owed, resulting in bankruptcy for many of the defendants.
While those affected were arguably poorly advised by their financial advisory companies, none of the advisers appear to have been prosecuted for their role in the illicit scheme. While it is, of course, right to prosecute the clients benefiting from such illegal behavior, unless their advisers are also held similarly accountable, there appears to be little deterrent to prevent them from giving similarly unethical advice to their next intake of clients.
If advisory companies were sufficiently discouraged from offering poor or illegitimate advice in the first place—whether by the threat of financial penalties or criminal convictions—there would doubtless be far fewer instances of evasion requiring post hoc action by insolvency practitioners.
Focusing on prevention as well as cure would be of great financial benefit to both under-resourced regulators and over-extended taxpayers, at a time when high inflation and low growth means every penny counts more than ever.
Role of Insolvency Practitioners
The inclination of most insolvency practitioners is, as would be expected, to resolve situations in as non-contentious and constructive manner as possible, according to the circumstances of each case. However, often the wrongdoing of their opponents means that litigation is an inevitable and necessary route to take in order to make recoveries on behalf of creditors—with HMRC often the largest creditor.
The role of insolvency practitioners continues to serve a vital national interest, helping to recover funds illegally diverted from the public purse, and acting as a preemptive deterrent to would-be tax evaders when secured convictions are publicized via the press and other media. At a time when negative perceptions of what the work of an insolvency practitioner entails are exacerbating recruitment shortages in the sector, it is incumbent on the profession to fully explain the crucial and beneficial part they play in bringing about a more equitable society for all.
Insolvencies are a stressful time for those involved, whether creditors, debtors, or those tasked with the role of achieving fair settlement for all parties. Insolvency practitioners are keenly aware that they must tread a fine line to avoid unnecessary distress on the way to concluding a case. At the same time, success stories such as Becker’s conviction highlight the need for tough probing of defendants to fully prove, and win, the type of case that benefits all honest taxpayers and protects the integrity of the entire taxation system.