In this episode, what did the budgets tell us about HMRC’s ability to investigate fraud? How does HMRC intend to recoup wrongfully claimed funds which they consider to be linked to fraudulent activity? As a result, what type of penalties and actions for prosecutions are we likely to see from HMRC?
Hello and welcome to the Mishcon Academy Digital Sessions podcast. I’m James Watson, an Associate in the White Collar Crime and Investigations Group, and I’m joined remotely by my colleague, Tabassum Khan, an Associate in the Tax Disputes and Investigations Team.
We were all interested to see the outcome of the 2021 budget a few weeks ago, particularly in relation to the new measures introduced for HMRC to investigate tax-related fraud. So, Tabassum, what did we learn about HMRC’s plans to investigate fraud?
So, the budget gave us a good snapshot into what the Government’s plans are in terms of funding across all sectors but specifically for HMRC, we identified that significant funding will be made available to HMRC to tackle fraud but specifically with respect of Covid-19 related support schemes and related fraud which has derived from the Furlough Scheme and the Self-Employed Income Support Scheme. The budget had a variety of figures setting out the numbers claimed but in summary, out of the £53.8 billion paid out under the Furlough Scheme, £3.6 billion of those payments were wrongfully claimed and £2 billion worth of this were linked to fraudulent activity.
So, we already had an idea of HMRC’s approach given the last year following the introduction of the Furlough Scheme and the Self-Employed Income Support Scheme. Following the enactment of the Finance Act 2020, we saw that HMRC were given additional powers to recover payments under the Furlough Scheme and the SE1SS Scheme, so HMRC are able to raise Income Tax Assessments to recover amounts claimed incorrectly. They have the ability to issue penalties of up to 100% and although a grace period was offered following the enforcement of the Finance Act, if any voluntary payments or any voluntary disclosures were made after the grace period, HMRC were able to issue penalties for deliberate conduct and had the power to hold company officers jointly and severely liable where business has become insolvent. So, although as mentioned previously, an incentive was offered to businesses and employers in the form of an amnesty window, this was offered following the enactment of the Finance Act following 90 days taking us to October 2020 and also the clock started ticking 90 days after one establishes that the payment claimed was made erroneously. However, since the amnesty window has closed, HMRC have identified a number of fraudulent claims and this has continued to increase over the course of the last year.
What has been interesting is we understand that in relation to the notifications of over-payments that have been made, HMRC have received over 14,000 notifications for the Furlough Scheme and 4,000 in relation to the Self-Employment Income Support Scheme and as a result almost £500 million has been voluntarily repaid to HMRC with respect to the Furlough Scheme and £14 million towards the Self-Employment Income Support Scheme. So, quite a lot has been recouped by HMRC already but it is important to stress that whilst the headlines are sort of emphasising the sort of fraudulent claims that have been made, this is a mixture of erroneous claims as well as fraudulent claims and essentially employers just have to be aware of the scheme rules and encouraged to review the measures that are in place to ensure that they do not inadvertently breach the scheme and be exposed to the risk of penalties.
So, Tabassum, you mentioned that the amnesty window has now closed. What are HMRC’s plans for the future on how it’s going to approach these overpayments?
Following the closure of the amnesty window, we have seen a shift away from HMRC’s usual approach of issuing nudge letters and trying to prompt taxpayers to come forward to make voluntary disclosures and they seem to have been going towards a more direct approach. We saw that towards the end of last year; HMRC announced that they would be publishing information with respect of employers who have made claims under the Furlough Scheme. So, information such as the company name, the amounts claimed and the number of employees who will be subject to the scheme in an attempt for further transparency and to discourage fraud. In addition to this, the Government are also investing a further £180 million in additional resources and new technology which the budget tells us is forecast to bring in £1.6 billion worth of additional tax revenue. There hasn’t been too much detail with respect of the specifics of where this will be invested but the budget advises that it will be put into further IT systems; recruitment of additional staff in order to target non-compliance through illicit financial flows; modernising the business rate system for further transparency and also to continue funding compliance work on loan charges, historic disguise of remuneration cases and just to encourage early intervention to individuals in order to exit tax-avoidance schemes.
What penalties are we likely to see HMRC dish out?
So in respect of potential penalties, the Finance Act allows HMRC to recover the support payments through a 100% tax charge on the payments claimed, whether they were wrongfully claimed or erroneously claimed and also in cases of deliberate non-compliance, which if HMRC find that behaviours have been deliberate, this creates a reputational risk of being included to HMRC’s list of deliberate tax defaulters. So, there is a limit to how far these investigations are able to go and it may be the case that some may end up subject to criminal prosecutions.
Yes, I think it’s likely that given that the Government announced increased funding for a Tax Protection Task Force who are now going to receive approximately £100 million in funding in order to investigate and prosecute fraud, that we’re going to see an increase in this type of activity and in fact, this is one of the largest planned responses by HMRC to specifically tackle the fraud risk. It’s anticipated from the budget this funding will go to a team of over 1,200 HMRC officials who will be reviewing payment data, PAYE records and also quite importantly whistle-blower reports, because over the past twelve months we’ve seen a significant increase in individuals who have come forward to HMRC to report tax fraud.
It was set out in the Government that there were a number of areas that HMRC are specifically going to be targeting. These include the powers to tackle electronic sales suppression. So, the plan is that the Government will introduce new powers to make the possession, manufacture, distribution and promotion of electronic sales suppression software and hardware an offence. So, this will enable HMRC to tackle tax evasion, undertaken by those businesses that use software and hardware in order to hide or reduce the value of transactions that they’ve been involved in and also therefore, correspondingly the tax liability that comes with this. This new ESS specific information powers will allow HMRC investigators to identify the developers and suppliers of this software in order to tackle this area of fraud.
We also saw in the budget, that HMRC are going to be looking at the OECD reporting rules for digital platforms and the Government plans to consult on the implementation of these rules that will require digital platforms to send out to the income of their sellers to both HMRC and the seller themselves. So, the purpose of this is really to address the so-called Gig Economy for those who are using eBay or Amazon Marketplaces as a business and it will help direct HMRC to those individuals who are potentially making a significant profit off these platforms, but not declaring it as tax.
There was a third area that was also identified in the budget which was preventing the abuse of the Research and Development Relief for SME’s, those are small and medium sized enterprises and this will apply for accounting periods beginning on or after the 1 April 2021. So, that will start in the next couple of weeks. The purpose of this is that the amount that a SME will be able to claim back under this relief will in fact be capped at £20,000 plus three times the company’s total PAYE and NIC liability in order to deter excessive and potentially fraudulent claims under this relief system.
So, in summary, HMRC is going to be getting more data than ever on which it will be able to base its investigations and when you combine this with other information sources that they have, such as the increase in whistle-blower reports, PAYE data and the information provided by applicants to the support scene, we’re going to see a wealth of material that Revenue and Customs are now going to have in order to investigate and potentially use to mount prosecutions on and this all comes in the context of the Common Reporting Standard, which has been in place for a number of years now, and this covers over 100 jurisdictions and calls on the members of the Common Reporting Standard to obtain data from their financial institutions and automatically exchange that information on an annual basis. So, through this, HMRC has a pool of data on a number of offshore assets belonging to UK taxpayers.
There is also the Connect System for investigations which enables HMRC to scrutinise over 22 billion lines of data about UK taxpayers themselves, including their self-assessment returns, their property and general financial data and through this analysis, HMRC has been able to identify over 500,000 cases to investigate and with the improved technology, the further powers that it is going to have that are identified in the budget and the increase in staff numbers, we’re going to see that HMRC will have the ability to make more of all this data than it has in the past.
So, what do you think we’ll see going forward with respect of action for prosecutions?
We’ve seen HMRC and the NCA already carry out a number of arrests in connection with some of these support schemes such as the Eat Out to Help Out and the Coronavirus Job Retention Scheme, which is essentially the Furlough Scheme and in these instances which were quite high-profile and reported in a number of newspapers, we saw individuals charged with offences such as cheating the public revenue and fraud by force representation. More generally, we expect that HMRC’s enforcement action is going to touch on various sectors and entities and that’s going to range from corporates, as we’ve seen with the previous arrests that have taken place, high net worth individuals and business owners, who are going to be the prime candidates for investigation under the, either the job retention scheme or the Eat Out to Help Out scheme. But we’re also going to see Revenue and Customs focus on those smaller traders such as those that use the online platform and the Gig Economy and they are likely to therefore cover quite a broad range of people.
As part of this, the agency has made clear that it was going to be investigating tax evasion generally and as it has done in the past, be investigating specific sectors such as Rugby Clubs which were announced this month. We’ve also seen investigations into company bank accounts being frozen as well as media devices being seized. So, we wouldn’t be surprised if once Covid restrictions ease, we will see a number of dawn raids being carried out as people return to the offices. More broadly, we could also see a development in the offence of the corporate evasion of tax offences, which apply to corporate bodies and were brought into force in 2017 being used. HMRC releases bi-annual updates about the number of corporate criminal offences it has investigated and it will be aiming to add some statistics to that showing that it has made convictions under this 2017 legislation. Last October, HMRC published figures showing that it is reviewing 31 of these potential cases involving the corporate criminal offences and, in fact, has 13 live investigations so we’re likely to see that number increase in their next update.
So, it does seem like rather than announcing tax rises for the years to come, we will see from the Government far effective enforcement action in order to recover monies that have been claimed fraudulently under the Government Support Schemes, particularly as the schemes have been extended towards the end of this year. So, it is likely that there’ll be an increased focus on investigations and enforcement and it would be sensible to keep an eye out of future changes and further transparency on what HMRC will do in order to recoup these monies.
Well, that’s it for now. Let’s wrap up there. I would like to say thanks so much to Tabassum Khan for joining me for this Mishcon Academy Digital Sessions podcast. I’m James Watson and do look out for the next podcast in the series.
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Until next time, take care.
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