This article originally appeared in Drapers.
The number of court cases being filed against fashion businesses for alleged tax evasion and fraud are expected to rise as HM Revenue & Customs (HMRC) 'rag trade taskforce' gathers pace.
HMRC is six months into a two-year initiative designed to recoup an estimated £9m in unpaid taxes from the fashion industry.
Every part of the industry is under scrutiny, from manufacturing to wholesale and retail, and even textile recycling, while businesses in the Midlands, north Wales and the Northeast are particularly under the microscope, after being identified as "high rish trade sectors and locations".
In categorising fashion as high risk, HMRC has placed parts of it alongside the likes of alcohol rings in Scotland and dodgy landlords in the Southeast, both of which have been the target of taskforces.
It is perhaps the nature of the fashion business that leads it to be regarded in this way. There are lots of small firms that can – and do – operate under the radar, as well as many older firms that work on a cash basis and friends doing favours that might not be officially recorded. But HMRC, under pressure to deliver millions of pounds to the UK's impoverished Treasury, is starting to crack down on this kind of behaviour.
Taskforces have already swooped on some suspected fraudsters. In May, three men and two women were arrested in Leicester on suspicion of tax fraud and money laundering offences totaling £300,000. Three homes and one factory were searched and "substantial sums of cash" seized.
Although HMRC declined to go into specifies regarding the operation, a spokeswoman said the tax department was on track to meet its £9m target.
HMRC has also had recent success with fashion business prosecutions, including the criminal conviction of punkyfish founder Kemal Gediz in May. The young fashion brand's director was jailed for 18 onths after failing to pay almost £68,000 in tax and National Insurance contributions.
Last week Drapers reported another case, due in the Old Bailey in November, involving Charles Boyd-Bowman. A former director of his family's shirtmaking firm, Rayner & Sturges, Boyd-Bowman is facing allegations over unpaid VAT and National Insurance through to be worth £270,000. If found guilty he could face a custodial sentence.
The industry is bracing itself for more such cases, but it is thought many of these could be settled outside court, given the relatively short time frame HMRC has to recover the money and the lengthy nature of the courts system.
"Fashion companies are aware that HMRC is targeting the industry," says Stephen Sidkin, partner at law firm Fox Williams. "The Treasury has made it clear that revenue needs to be raised, and fashion is a target-rich environment."
As well as the "more heinous" charges of VAT fraud, HMRC is asking fashion businesses to justify why they hired people-models, for example-on a self-employed basis. It is also thought companies that create offshore sister companies as vehicles for manufacturing are being scrutinised to see whether there are in fact enabling a tax dodge.
There is a distinction between the tow kinds of practice – VAT fraud is taken more seriously and is more likely to result in jail terms. As one insider note: "We could see a lot more people paying a visit to one of Her Majesty's hotels." But there are very real consequences for the lesser offences, as the arrival of a six-figure bill could cripple some firms.
Its seems likely that smaller firms will be targeted more than the bigger players in the sector. "It's not fair, but naturally HMRC is going to pick the low hanging fruit first," Sidkin says.
But he believes the outcome could be positive "for the industry, and for the UK as a whole", arguing that those who are only able to stay in business by developing dodgy practices "shouldn't have been in business in the first place".