Common Questions About Tax Fraud

The term “tax fraud” sounds frightening — and it is a serious matter — but it’s also often misunderstood.

In many cases, what starts as poor record-keeping or unintentional mistakes can quickly escalate into allegations of fraud if not handled properly.

Here are the most common questions people ask us when they find themselves worried about tax fraud or contacted by HMRC.

What is tax fraud?

Please note that tax fraud cannot be committed accidentally. 

Tax fraud (or tax evasion) is when someone deliberately provides false or misleading information to HMRC in order to reduce their tax bill or claim money they’re not entitled to.

It can include:

• Underreporting income or sales
• Inflating expenses or deductions
• Hiding cash or offshore income
• Using false invoices or records
• Failing to submit tax returns for years

Even if mistakes were not intentional, HMRC may initially treat them as potential fraud — so it’s vital to respond correctly and quickly.

What’s the difference between tax fraud and tax avoidance?

This is one of the most common points of confusion:

• Tax avoidance is legal — it means using legitimate rules or allowances to reduce tax (for example, pensions or investments).
• Tax fraud or evasion is illegal — it means hiding income, falsifying records, or deliberately misleading HMRC.

The line between the two can sometimes be complex, which is why professional advice is essential if HMRC is challenging your tax position.

How does HMRC detect tax fraud?

HMRC has advanced systems and cross-agency data matching tools (like their “Connect” system) that track:

• Bank transactions
• Property ownership
• Online platform income (eBay, Airbnb, Uber, etc.)
• International transfers and offshore accounts
• VAT discrepancies between suppliers and customers

They also receive whistleblower reports and data from overseas tax authorities.

If HMRC suspects tax fraud, they can open an investigation under Code of Practice 9 (COP9) or a criminal investigation in serious cases.

What are the penalties for tax fraud?

Penalties depend on the severity and whether the fraud was deliberate:

• Careless mistake: up to 30% of the unpaid tax
• Deliberate understatement: up to 70%
• Deliberate and concealed fraud: up to 100% (or 200% for offshore)
• Criminal prosecution: fines, confiscation of assets, and/or imprisonment

However, penalties can be reduced significantly if you disclose voluntarily and cooperate fully with HMRC.

What should I do if you have committed tax fraud?

If you believe you’ve made serious mistakes, you should make a voluntary disclosure before HMRC contacts you.

You can do this through:

• The Contractual Disclosure Facility (COP9) — for deliberate errors
• The Digital Disclosure Service (DDS) — for non-deliberate issues

By disclosing voluntarily, you’ll almost always avoid criminal prosecution and benefit from reduced penalties.

It’s best to get our professional help to prepare a full disclosure — including bank records, accounts, and explanations — as HMRC will expect detailed evidence.

What happens if HMRC opens a tax fraud investigation?

If HMRC suspects fraud, they’ll write to you under COP9 or may launch a criminal investigation in severe cases.

The process typically includes:

1. An opening letter outlining allegations
2. A request for detailed records and explanations
3. Possible interviews under caution
4. Review of financial data and personal assets

At this stage, you should not respond without specialist advice — any wrong or incomplete information can worsen your position.

Can I go to prison for tax fraud?

Yes.

Most civil tax fraud cases are handled through financial penalties, not imprisonment, especially if you:

• Cooperate with HMRC
• Make a full disclosure
• Repay the owed tax
• Pay the agreed penalties and interest.

How long can HMRC look back for tax fraud?

HMRC can review up to:

• 4 years for simple mistakes
• 6 years for careless errors
• 20 years for deliberate fraud

This means you might need to reconstruct accounts, find old records, or rebuild tax returns — a time-consuming process, but necessary for full disclosure.

Can I fix things if I didn’t submit tax returns for years?

Yes — and you absolutely should.

You can come forward through a historic disclosure or voluntary settlement process.

HMRC prefers cooperation and usually offers more lenient treatment if you contact them before they find the issue.

Just be prepared: you’ll still need to prepare full accounts and documentation for all missing years, which takes time and professional input.

How can our tax specialist help in a fraud case?

Our professional adviser experienced in HMRC fraud cases can:

1. Assess whether HMRC’s suspicion is justified
2. Prepare voluntary disclosure reports (COP9 or DDS)
3. Negotiate reduced penalties
4. Represent you in correspondence or meetings with HMRC
5. Protect you from self-incrimination

The earlier you involve a specialist, the better the outcome is likely to be.