Before the close of 2022, the Joint Chiefs of Global Tax Enforcement (an association of senior officers from the tax authorities of Australia, Canada, the Netherlands, US and UK known as the “J5”) announced the launch of their international probe into the use of sales suppression software. This is the latest international probe successfully conducted by the J5, following the Euro Pacific Bank probe which took place earlier last year.
In December 2022, His Majesty’s Revenue and Customs (HMRC) announced that it had arrested five individuals in the UK, who had allegedly designed and sold electronic sales suppression (ESS) systems internationally. As part of this operation more than 100 HMRC officers also raided over 90 companies across the UK. These latest arrests follow three arrests made in May 2022 for similar offences, which involved thirty businesses, including shops, takeaways and restaurants being visited by HMRC officials.
Till Sales Fraud
ESS is typically used when businesses intend to reduce their turnover in order to pay less tax, used as a tool to hide or reduce the value of the individual transactions in electronic sales records. An ESS tool is usually a piece of software, computer code script or hardware. According to Simon York, Director of HMRC's Fraud Investigation Service, the impact of the ESS has resulted in thousands of businesses being able to evade huge amounts of tax, particularly during the COVID-19 pandemic, and he warned that there would be further arrests for ESS related tax offences to come.
The launch of this fresh probe into the use and supply of ESS systems is particularly significant for the UK, given that HMRC has made efforts to tackle ESS since its inception and the UK Government announced new powers for HMRC to tackle ESS in the Spring Budget of 2021. The rise of ESS use occurred during the COVID-19 pandemic, where businesses began using ESS tools to facilitate furlough fraud (ESS allegedly first introduced in the UK and later gaining prevalence in the United States and Australia). As a result of amendments to the Finance Act 2022, HMRC is able to exercise new “information powers” to gather intelligence in relation to suspected use of ESS and is able to issue an information notice in relation to ESS specifically. Failure to comply with an information notice could lead to penalties. The result of HMRC's investigations could be a hefty penalty charge, including an initial fixed penalty of £1000 and daily penalties of up to £75 per day for being in possession of an ESS tool. Penalties rise to a maximum of £50,000 per tool where one has made, supplied or promoted an ESS tool.
HMRC offers a time limited opportunity
Shortly after the probe, as a means to implement preventive measures, HMRC offered users of ESS tools an opportunity to qualify for reductions in the penalty imposed by registering for a voluntary disclosure facility. This enables users to make a voluntary disclosure by 9 April 2023, before HMRC commences an investigation. Given the short timeframes for making a disclosure, it is crucial for users to consider making a voluntary disclosure before the facility closes, or make a disclosure through another route such as CoP 9, which could also provide protection from potential criminal prosecution. It is evident that, following the success of the probe into those developing and selling ESS tools, HMRC will seek to crack down on businesses that have utilised ESS. Therefore, active steps should be taken to make voluntary disclosures in order to mitigate penalties and avoid HMRC opening its own enquiries.
Paul Noble, Partner at Mishcon de Reya, commented: "This is an area that HMRC and overseas colleagues have dedicated a great deal of resource to and have therefore gained visibility of what's been going on - and identified who has been using ESS. The disclosure opportunity offers users the chance to avoid potential criminal prosecution and to reduce penalties charged by HMRC. Those failing to be persuaded by this can expect serious investigation from HMRC."