This question arises out of comments made on Punternet suggesting that because some working girls have been found not guilty of evading income tax on their earnings from prostitution it therefore follows that there is some doubt about whether they are taxable at all. The person who raised the issue said that she had spoken to three people in the Revenue who had given her conflicting answers, and also spoken to a top lawyer who had told her it was a grey area.
Let’s try to untangle this.
First of all, this is not a grey area: income from sex work is taxable. Yet it is also true that on occasions people doing sex work of various kinds have been prosecuted for tax evasion, and some of them have been acquitted. So, how does that work?
The Taxes Acts charge income tax on the profits from any trade, profession or vocation. The word “trade” is not defined other than “trade includes every trade, manufacture, adventure or concern in the nature of trade.” No distinction is made between ordinary run of the mill businesses, and those which are immoral or downright illegal. Any doubt about whether prostitution is within the income tax net was removed by the Court of Appeal decision in Inland Revenue Commissioners v Aken (1990). For a detailed account of this case and the background see the Whiplash cases, but to cut a very long story short: Lindi St Clair (aka Miss Whiplash, aka Marion Akin – the Inland Revenue managed to spell her name incorrectly as Aken) argued that as her income was obtained from immoral activities it could not taxable. She lost.
It is important to note that this was not a criminal case. Lindi was never prosecuted for any tax offences. Her accountant had negotiated her tax liabilities and reached an agreement on her behalf, but when she did not pay the Revenue launched a civil case to recover the tax she owed, and eventually the case ended up in the Court of Appeal.
The effect of the decision in this case is correctly summed up in the HMRC Business Income Manual BIM65001
If the activities of a prostitute or any other person deriving income from prostitution are organised in such a way as to constitute a trade or profession, the profits are liable to income tax. This was confirmed by the ‘Miss Whiplash’ case, CIR v Aken  63TC395.
So far, so good, but what of the tax evasion cases?
The widely reported recent jailing of Donna Asutaits does not tell us much because she pleaded guilty. And as I have previously discussed I have my doubts about whether this case was really about prostitution at all.
Much more interesting is the case of Angela Nangle (working name Letitcia) who was found not guilty of tax evasion in 2008. Details are a bit sparse but the Brighton Argus carried two court reports Taxing time for Brighton sex star and after her acquittal, Hooker dodges tax fraud conviction. Letitcia has also made some comments about the case on a couple of the industry message boards.
Nangle was charged with the criminal offence of fraudulently evading income tax. Normally, of course, ignorance of the law is no excuse but things are slightly different with this offence because what the law says (section 106A Taxes Management Act 1970) is:
Offence of fraudulent evasion of income tax.
(1)A person commits an offence if he is knowingly concerned in the fraudulent evasion of income tax by him or any other person.
(2)A person guilty of an offence under this section is liable—
(a)on summary conviction, to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum, or both;
(b)on conviction on indictment, to imprisonment for a term not exceeding seven years or a fine, or both.
The important word is ‘knowingly’. You cannot be convicted of this offence unless the prosecution can convince a jury that you knew you were fraudulently evading income tax. Angela Nangle claimed that she did not appreciate that immoral earnings were taxable, and the court believed her. Actually it’s hard to see why Nangle was ever prosecuted. She claimed it was malicious, and she may have a point. The amount of tax involved was around £11,000 which is not particularly high, and the Revenue ought to have known their case was not particularly strong. Maybe they were swayed by the fact that she had worked for them as a cleaner and filing clerk some 30 years earlier?
In terms of her defence there are similarities with the recent Harry Rednapp case in which he successfully argued he was clueless about business and tax, and therefore could not be guilty of knowingly evading tax. You may recall that he was acquitted of fraudulent tax evasion on the same day that Fabio Capello resigned as England manager, and having cleared his name he was widely expected to get the job. Unfortunately for him the FA decided to go with a man who is fluent in five languages and can get by in another three, rather than entrust the job to someone whose defence included the statements, “I am completely and utterly disorganised. I write like a two-year-old and I can’t spell” and “I have never written a letter in my life.”
So Angela Nangle was found not guilty of fraudulently evading income tax, but did she still have to pay the tax? Yes she did. The criminal case was not about whether she needed to pay tax, but whether she had knowingly been involved in fraudulently evading tax. HMRC have a large range of (non-criminal) powers and sanctions which enable them to collect unpaid tax, and also allow them to charge interest and penalties. If necessary they can be enforced in the non-criminal courts and can result in visits from bailiffs and, ultimately, bankruptcy.
Think of it like this. Failing to pay your electricity bill is not a criminal offence, but tampering with your electricity meter or beating up the meter reader, is. If you don’t pay the bill you won’t be prosecuted but you may have bailiffs on your door-step or be made bankrupt. And if you don’t register and pay your tax you could be charged interest and penalties, have your possessions sold off, and ultimately be made bankrupt – as happened to Lindi St Clair (Miss Whiplash).
But if you tamper with your electricity meter or knowingly evade income tax you might face a period behind bars.
And if you are found not guilty of tax evasion it does not mean you don’t have to pay tax, any more than being acquitted of vandalising your meter entitles you to free electricity.
HMRC prosecute very few people: they don’t need to. But they are relentless in tracking down tax evaders and making them pay up.