3 | HMRC's increased criminal scrutiny of professional services firms: responding to production orders and managing risk
By Michelle Sloane and Maddie Wakeman
What we are seeing
HMRC is under sustained pressure from the Government to close the tax gap and increase revenue collection. Against the backdrop, we are seeing HMRC increasingly using criminal investigations and related enquiries to examine the role of professional advisers in suspected tax fraud.
In some cases, HMRC scrutiny has extended beyond the client to include the firm itself and, in certain cases, individual partners or employees connected with advice provided to clients.
This sits alongside HMRC’s broader enforcement focus on those it views as “enablers” or facilitators of tax evasion and fraud. In practice, that focus can mean more investigative attention on the advice given, the diligence undertaken, and the firm’s underlying files, working papers and communications.
Why this matters for your business?
As part of their intelligence gathering in respect of criminal investigations, HMRC are utilising production orders (PO) to compel professional services firms to disclose and produce information relating to client files and advice the firm provided to a client. Firms can then face a difficult tension between complying with the PO to avoid enforcement action for non-compliance and protecting client confidentiality to avoid breaching duties to the client and professional obligations.
Responding to a PO is fast-moving, with short deadlines and significant resource demands, and the risks sit on both sides because non-compliance can expose the firm (and, in some cases, individuals) to enforcement action, while over-disclosing or mishandling sensitive material can create civil, regulatory and reputational issues.
In some cases, HMRC’s engagement may go beyond documents. Individuals may be approached directly as suspects in HMRC's criminal investigation, invited to attend a voluntary interview under caution or even arrested. Even where a firm is not itself a suspect, interviews, arrests and related activity can be highly disruptive operationally and may raise immediate questions around internal communications, client management, regulatory notifications, insurance/indemnities, and support for affected staff.
What should you do? A practical response framework
A careful response is essential. Firms should take early steps to understand precisely what is being required, protect legally privileged material where applicable, preserve an auditable record of searches and decisions, and ensure communications are controlled and consistent, as the consequences can be significant if handled incorrectly.
Stage 1: Notices of Intention
- HMRC will typically provide notice of their intention to apply for a PO.
- Firms should consider whether they can challenge the issue or scope of a PO, for example if a condition for the exercise of the power will not be met or the timeframe of the request is too wide.
Stage 2: Issuance of a PO
- Once a PO has been issued, firms should ensure that they have a complete copy of the PO and the application which underlies it, and that they understand the scope and timeframe that has been set for compliance.
- Firms should ascertain whether they are required, or indeed able, to inform their client about the PO. Regulators may offer guidance as to whether a firm is required to inform their client and much depends on the statutory basis it has been issued.
- Firms may commit an offence if they inform their client that they have been served with a PO in relation to an investigation for certain sensitive offences, for example money laundering or terrorist financing offences.
Stage 3: Complying with the PO
- When complying with the PO, firms must ensure that they are only providing material that is in scope of the PO.
- Approach collection like an audit. Firms should keep a detailed record of the searches and date filters that were carried out, when the searches were carried out, what material was considered, and what material was provided or not provided.
- HMRC cannot compel the disclosure of privileged material. Firms should consider whether the documents requested are privileged and, if they are, should not provide them.
More generally, firms should also consider reviewing and, where necessary, strengthening internal processes, particularly in relation to high-value and higher-risk matters. This should include assessing the firm’s exposure, and the adequacy of its prevention procedures and wider compliance framework, under the Corporate Criminal Offences regime in Part 3 of the Criminal Finances Act 2017. Where there is any indication that HMRC may open, or is progressing, a criminal investigation involving the firm or its people, early specialist legal advice is essential.
