HMRC Tax Evasion Investigation: Unpaid PAYE and CIS

What is Cheating the Public Revenue and How Does It Differ from Tax Evasion?

Tax evasion is a broad term describing dishonest conduct intended to reduce or avoid a tax liability. 

Cheating the public revenue is the specific common law offence used to prosecute the most serious tax evasion cases in England and Wales. Late payment of PAYE or CIS, on its own, is a civil matter. 

The criminal offence and a tax debt are legally distinct things, and the presence of one does not automatically create the other.

The legal basis of the offence

Cheating the public revenue is a longstanding common law offence that remains available for serious cases involving dishonest interference with tax collection.

It can involve deliberately concealing liabilities, providing misleading information or taking other dishonest steps to prevent HMRC from receiving money lawfully due.

The offence does not always require a false statement. Dishonest conduct through an omission may also be relevant where the legal requirements are established.

However, the existence of unpaid tax alone does not prove cheating the public revenue. The prosecution must establish that the conduct was dishonest and had the required connection to the public revenue.

What the prosecution has to establish

Dishonesty is central to a prosecution for cheating the public revenue.

The prosecution must prove beyond reasonable doubt that the accused acted dishonestly in conduct intended to prejudice HMRC’s revenue. Ordinary carelessness or recklessness is not sufficient for this offence.

For example, a director who knowingly conceals unpaid deductions or provides false information to prevent recovery may be in a different position from one who openly reports the debt but cannot pay because customers have not settled their invoices.

The court will consider the evidence surrounding the director’s decisions, including what they knew about the tax liabilities and how they dealt with HMRC.

Genuine financial difficulty may provide important context, but it does not automatically establish that the conduct was honest.

How PAYE and CIS deductions are treated in Law

Employers must deduct PAYE income tax from employees’ wages and account for it to HMRC. Under CIS, contractors deduct tax from qualifying payments to subcontractors and pass those deductions to HMRC.

These deductions are statutory liabilities that the business must account for. They should not be treated as freely available funds simply because the money remains in the company’s bank account.

For most employers paying electronically, monthly PAYE payments are due by the 22nd of the following tax month. CIS deductions generally follow the same monthly payment deadline, although different arrangements may apply in particular circumstances.

Late payments can result in interest, penalties and recovery action.

If the company repeatedly uses money needed for PAYE or CIS to meet other expenses, HMRC may examine the decisions made and whether they involved dishonesty.

Why most arrears cases stay in the civil track

HMRC generally deals with unpaid PAYE and CIS through civil procedures.

These may include payment demands, interest, penalties, debt recovery and, where appropriate, a Time to Pay arrangement.

HMRC’s published policy reserves criminal investigation for cases where the seriousness of the conduct justifies that approach, including suspected deliberate concealment, deception or systematic fraud.

A business with tax arrears is therefore not automatically facing criminal prosecution.

However, if HMRC has arrested you on suspicion of tax evasion, the matter has moved beyond ordinary debt collection. You should establish the allegation and obtain criminal defence advice before an interview.

Does Using the Money to Keep the Business Trading Affect My Defence Against Tax Evasion Allegations?

Using deducted PAYE or CIS to fund trading is not an automatic defence to tax evasion allegations, and it is not automatically an aggravating factor either. 

Its significance depends on how the decision was made, whether HMRC was kept informed, what records exist and what the director genuinely believed at the time. 

Each of those questions is a matter of evidence.

Why the trust-like character of deducted tax matters

PAYE and CIS deductions represent amounts the company is legally required to account for and pay to HMRC.

Although the precise legal treatment of these deductions should not be confused with a general trust over the company’s bank balance, directors cannot treat the obligation to remit them as optional.

If you chose to pay suppliers, wages or other creditors while leaving PAYE or CIS unpaid, investigators may examine what you knew about the liabilities and whether you intended to avoid payment dishonestly.

The decision to prioritise essential business expenses may be relevant to explaining the company’s position, but it does not remove the tax debt.

What records help explain the decisions made

Payroll records, CIS returns, bank statements and cashflow forecasts can help establish the company’s financial position when payments were missed.

Board minutes, correspondence with HMRC and advice received from accountants may also show what options were considered.

For example, records showing that you contacted HMRC, explained the financial difficulties and attempted to arrange repayment may support your account of events.

By contrast, investigators may examine unexplained payments to directors or connected businesses while substantial tax liabilities remained unpaid.

Preserve the original records, including material that may appear unfavourable. They should not be altered or deleted after an investigation begins.

When context may weigh in favour of the director

Evidence that you acted openly with HMRC, sought professional advice and genuinely expected the business to recover may be relevant to whether the prosecution can prove dishonesty.

Cashflow forecasts and repayment proposals may help explain why particular payments were made. However, these records do not create an automatic legal defence.

The court must consider the circumstances as a whole, including whether your stated intentions are supported by what you actually did.

Conduct that may be treated as aggravating in a tax evasion case

HMRC may view deliberate concealment, false records and repeated misleading explanations as evidence of dishonesty.

Payments made to directors or connected parties while tax remained unpaid may also attract scrutiny, particularly where the business had no realistic means of meeting its liabilities.

Ignoring HMRC correspondence or continuing to incur deductions without a credible payment plan may further complicate your position.

However, paying another creditor before HMRC does not automatically establish tax evasion. The prosecution must still prove the criminal offence.

Can HMRC Hold Me Personally Liable for the Company’s Tax Debts?

Yes, in certain circumstances. However, being a company director does not automatically make you responsible for unpaid PAYE, CIS or National Insurance contributions.

HMRC has specific statutory powers to pursue directors personally, and the applicable rules depend on the type of debt and the conduct involved.

What a Personal Liability Notice is and when HMRC can issue one

A Personal Liability Notice (PLN) can make a director or other company officer personally responsible for specified liabilities where the statutory conditions are met.

For example, HMRC may issue a PLN for unpaid National Insurance contributions where the company’s failure to pay was attributable to an officer’s fraud or neglect. This is a civil mechanism and does not require a criminal conviction for tax evasion.

Separate provisions allow PLNs for certain narrowly defined PAYE debts, including particular employment intermediary and anti-avoidance arrangements.

An ordinary unpaid PAYE or CIS balance does not automatically fall within those provisions.

HMRC may also pursue personal liability through other statutory mechanisms in appropriate cases, including certain joint and several liability notices.

The first question is therefore which legal power HMRC is using and whether its conditions are satisfied.

The 30-day deadline to appeal

Some Personal Liability Notices provide 30 days for lodging an appeal, but the applicable procedure and starting date depend on the legislation under which the notice was issued.

For certain PAYE-related PLNs, an appeal must be made within 30 days beginning with the day the notice is served.

National Insurance PLNs follow their own decision and appeal procedures.

Do not assume that every notice can be challenged through the same process or that missing the ordinary deadline necessarily makes a late appeal impossible.

If you receive a PLN or another notice imposing personal liability, have its legal basis, appeal rights and deadlines checked immediately.

Director disqualification as a separate risk

Unpaid company taxes can also become relevant to director disqualification proceedings.

Under the Company Directors Disqualification Act 1986, a director may be disqualified where their conduct meets the applicable legal grounds, including unfit conduct connected with company management.

For example, allowing significant tax debts to accumulate while continuing to trade may form part of an assessment of a director’s conduct.

Disqualification is separate from criminal prosecution and may arise without a tax evasion conviction.

The maximum period is generally fifteen years, although the applicable minimum and maximum depend on the grounds for disqualification.

How these tracks relate to the criminal tax evasion investigation

Criminal prosecution, personal liability for specified tax debts and director disqualification are separate legal processes.

They have different requirements and may proceed independently. For example, HMRC may pursue recovery of a company’s debt while also investigating whether a director acted dishonestly.

A criminal defence solicitor can advise on the investigation while working with tax and insolvency specialists where additional proceedings are involved.

Penalties and Sentencing for Tax Evasion by Cheating the Public Revenue

Cheating the public revenue is a serious criminal offence tried in the Crown Court.

It carries a maximum sentence of life imprisonment, although the sentence imposed depends on the seriousness of the offending and the applicable guideline.

A conviction may also lead to financial consequences beyond any custodial sentence.

Sentencing in practice

The Sentencing Council has a specific revenue fraud guideline covering cheating the public revenue.

Courts assess culpability and financial harm, considering matters such as the amount of tax involved, the duration of the conduct, planning and the defendant’s role.

A sustained, organised scheme involving substantial sums will generally be treated more seriously than conduct involving limited planning and a lower financial value.

For cheating the public revenue, the guideline offence range is three to seventeen years’ custody, although the court must apply the guideline appropriately to the facts, including its provisions for lower-value cases.

The statutory maximum remains life imprisonment.

Credit for a guilty plea

A guilty plea may reduce the sentence, depending on when it is entered. A plea at the first appropriate opportunity can generally result in a reduction of up to one third.

The available reduction becomes smaller as proceedings progress.

Whether to plead guilty is a decision that should follow legal advice about the charge, evidence and available defences.

How sentencing differs from tax recovery and civil penalties

A criminal sentence does not automatically remove the company’s outstanding tax liabilities.

HMRC may continue recovery action, subject to the applicable legal procedures. Civil penalties, interest and personal liability proceedings may also arise separately from criminal sentencing.

A director may therefore face criminal consequences while the company remains responsible for unpaid PAYE or CIS.

Personal recovery from the director requires its own legal basis and should not be assumed from the criminal charge alone.

Can My Company Keep Trading During a Tax Evasion Investigation?

Yes. An HMRC investigation or the arrest of a director does not automatically prevent a company from continuing to trade.

However, whether trading should continue depends on the company’s finances, its ability to meet future obligations and the directors’ legal duties.

Directors’ duties while under investigation

Directors remain responsible for managing the company lawfully while a criminal investigation is underway.

Their duties under the Companies Act 2006 continue to apply. Where the company is insolvent or approaching insolvency, the interests of creditors become increasingly important.

A director who allows the business to continue trading in circumstances that meet the legal requirements for wrongful trading may face personal consequences in subsequent insolvency proceedings.

However, insolvency does not automatically mean that continuing to trade is unlawful. The company’s prospects and the steps taken to protect creditors matter.

When insolvency advice is needed

If the company cannot pay PAYE, CIS or other debts when they fall due, its financial position should be assessed promptly.

An insolvency practitioner can review whether the company is insolvent, what options remain available and whether trading can continue responsibly.

Possible options may include restructuring, a formal repayment arrangement or an insolvency procedure.

The appropriate course depends on the company’s circumstances.

Where criminal allegations are also being investigated, insolvency decisions should be considered alongside criminal defence advice because company records and past decisions may be relevant to both.

Practical steps for the company

The company must continue to operate payroll and CIS arrangements lawfully. Future deductions must be properly recorded and accounted for to HMRC.

If the company cannot meet upcoming liabilities, directors should assess its financial position and obtain advice before making further commitments.

Continuing to accumulate unpaid tax without a realistic plan may increase the company’s financial difficulties and expose directors to additional scrutiny.

Keep accurate records of decisions, creditor payments and communications with HMRC.

What to Do After an HMRC Arrest or Before an Interview Under Caution

If HMRC has arrested you or invited you to attend an interview under caution about suspected tax evasion, obtain criminal defence advice before answering substantive questions.

An interview under caution is a formal investigative process, even where you attend voluntarily.

The right to legal advice under PACE

You have the right to obtain legal advice before and during an interview under caution. Free independent legal advice is available for qualifying police station interviews, including those conducted in connection with HMRC criminal investigations.

You can request a solicitor or arrange representation through a firm experienced in financial crime.

A solicitor can explain the allegation, consider the information disclosed by investigators and advise on your response.

Why answering questions without advice carries real risk

Investigators may ask about payroll deductions, payments to creditors, cashflow decisions and what you told HMRC.

Your answers may later be used in evidence. You have the right to silence, although failing to mention facts you later rely on can sometimes lead to an adverse inference.

A solicitor can explain these consequences and advise whether to answer questions, provide a prepared statement or exercise your right to silence.

Preservation of records

Preserve payroll and CIS records, tax returns, bank statements, cashflow forecasts and relevant company correspondence. Board minutes and professional advice received at the time may also be relevant.

Do not delete, alter or create replacement documents to explain earlier decisions.

If information is stored in accounting software or cloud systems, tell your solicitor where the records are held and whether there is any risk of them being lost.

Checking notices, bail conditions and deadlines

After an arrest, you may be released on bail or under investigation. Read any bail conditions carefully and comply with them.

If HMRC has also issued civil assessments, payment demands or notices seeking personal liability, their deadlines may continue independently of the criminal investigation.

Provide all correspondence to your solicitor or relevant tax adviser promptly.

Do not assume that dealing with the criminal investigation automatically pauses civil deadlines.

Specialist advice from the outset

An HMRC criminal investigation is different from an ordinary enquiry about unpaid tax. The allegations may concern years of financial records, decisions made by several people and the circumstances in which the company continued trading.

A criminal defence solicitor can examine whether the evidence supports dishonest conduct and advise on the interview and any subsequent proceedings.

Where the business is also facing serious financial difficulties, tax and insolvency advice may be needed alongside criminal representation.

If you are under investigation, our Fraud and Financial Crime solicitors can advise on the allegations, your personal position and the next steps.

Send an online enquiry or contact the firm to arrange a consultation.