Andrew Park, Andersen in the UK
HMRC has announced that it has seized so-called “non-fungible tokens” (NFTs) from three people it has under criminal investigation for organised VAT fraud. This is an important milestone as it is believed to be the first time that a UK law enforcement body has seized digital assets.
Elsewhere and only a few days earlier, HMRC’s close partner, the US Internal Revenue Service (IRS), announced the seizure of $3.6 billion in Bitcoin allegedly stolen in 2016.
Crypto assets – be that NFTs or the likes of Bitcoin - have been a major cause of concern to HMRC and its international partners for several years now. This amid concern that they were being acquired and held almost invisibly outside of the regulated financial system – to store the proceeds of crime or to generate huge undisclosed tax liabilities in their own right.
In this regard, it is important to realise that not only have many crypto assets like Bitcoin soared in value since inception but that every disposal of a crypto asset by a UK resident – whether sold for conventional currency, exchanged for a different form of crypto or used to pay for goods or services – is a potential taxable event.
The presumption of HMRC is that people lucky enough to have got into crypto early and sold in and out along the way will generally have made large – and often undisclosed – capital gains.
When HMRC spearheaded the creation of the Joint Chiefs of Global Tax Enforcement (J5) initiative with the US Internal Revenue Service in 2018, getting to grips with and taxing crypto assets was its number one stated priority.
Everyone wondered how it would do that given the seeming impenetrability of blockchain but in practice a big part of the solution has turned out to be quite “analogue” – the taxmen have used their information powers in their own jurisdictions to target the crypto exchanges with bulk data notices requiring disclosure of larger transactions and the identities of the individuals involved. They have then pooled information within a J5 Cyber Tax Crime unit and set about opening investigations on their own residents.
Meanwhile, in a separate policy development, HMRC and a handful of other UK government agencies acquired new civil powers to seize assets in January 2018 when the Criminal Finance Act 2017 took effect. The initial motivator for the new legislation was to crack down on people involved in overseas corruption from using the UK as a money laundering centre.
However, the scope is broad enough to enable Unexplained Wealth Orders against any party where there is reasonable grounds to suspect serious crime – including tax evasion – and the party concerned cannot provide an adequate explanation or evidence of how the assets in question (which must be worth more than £50,000) were legitimately acquired.
The orders must be granted by application to the UK High Court, but they need not be pursuant to a successful criminal prosecution, require only a civil standard of proof and can be sought without giving the targeted individuals any prior notice that the application is going to be heard in court.
This means that the court decides whether to grant the order without the property owner themselves having the opportunity to make representations and they can only seek to challenge and overturn after the event.
Readers will recall the first Unexplained Wealth Order to hit the headlines was in autumn 2018 when the National Crime Agency successfully froze the assets of the wife of a former Azerbaijani state banker.
HMRC’s use of its seizure powers has tended to be much more low profile but relentless. HMRC’s latest annual report for 2020/21 shows in that year alone it seized £218.4 million in assets.
Inevitably, as HMRC intelligence efforts shine a light on the previously hidden crypto activity of many UK residents, it is opening increasing numbers of investigations into people who have only disclosed modest amounts on their tax returns whilst transacting major amounts in crypto. HMRC is said to have c. 20 new criminal investigations underway involving crypto and for every criminal investigation there are likely to be dozens of civil investigations.
HMRC has been commendably restrained since 2018 in trying to use Unexplained Wealth Orders to bulldoze taxpayers during routine investigations. However, people who are found to have large crypto holdings or bank funds converted from crypto which bear no correlation to their conventional wealth and income face a nasty shock if they refuse to cooperate.