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Mishcon Academy: Digital Sessions podcast - Tax Investigations: HMRC investigations in the context of COVID-19

Posted on 16 November 2020

The Mishcon Academy Digital Sessions.  Conversations on the legal topics affecting businesses and individuals today.   

Matthew Ewens, Managing Associate

White Collar Crime, Mishcon de Reya

In this episode what powers are available to HMRC, how are HMRC likely to use those powers to recoup the costs of providing relief to individuals and businesses during Covid and how should you assess the risks and make sure you are in the best position should HMRC get in touch,

Hello and welcome to the Mishcon Academy Digital Sessions podcast.  I am Matthew Ewens, a Managing Associate in the White Collar Crime and investigations team at Mishcon, and I am joined by Jo Rickard, Partner and Head of that team, and Paul Noble, Partner in our Tax Disputes team. 

Jo Rickards, Partner

White Collar Crime, Mishcon de Reya

Hi Matthew.

Paul Noble, Partner

Tax Disputes, Mishcon de Reya

Hello Matthew.

Matthew Ewens, Managing Associate

White Collar Crime, Mishcon de Reya

Hi.  Since the start of the pandemic, the Government has implemented an unprecedented raft of new measures such as Eat Out to Help Out and job support or retention schemes.  These measures have been designed to assist individuals and businesses to weather the financial storm but inevitably HMRC and the NCA are starting to identify abusers of those measures.  We expect focus to increase as the Government seeks to replenish a significantly depleted Treasury.  For example, latest figures show that the furlough scheme has cost the UK £39 billion with around £2 billion being lost to organised crime.  In the UK, as in other European countries, we have seen an amnesty for businesses to encourage the declaration of any errors whilst honest mistakes are likely to see an exemption from further sanction, we expect deliberate and dishonest breaches to be the focus of further investigation and tougher sanctions.  In relation to the investigations, these are clearly hotting up with recent reports indicating that HMRC’s investigation rate is up by 40% which includes the widely publicised investigation into the alleged abuse of the Eat Out to Help Out scheme by Papa John’s.  HMRC has also acknowledged a reprioritising of compliance work during the pandemic and confirmed a continued commitment to tackle serious fraud and criminal attacks on the tax system.  So against that backdrop Jo, can we start by giving our listeners some background on HMRC’s investigatory function and explain why it is particularly important for people to be aware at the moment?

Jo Rickards, Partner

White Collar Crime, Mishcon de Reya

Yes, of course.  Well, its primary function is tax collection but in order to achieve that objective, obviously HMRC have got extensive powers to investigate tax evasion and tax fraud, and the Revenue looks very carefully at individuals’ tax returns or businesses’ returns and they really give a very close look to tax avoidance schemes, and on a larger scale sometimes tax is defrauded when organised crime get involved and make sophisticated attacks on the system either by abusing the VAT system between member states which is an Emtick situation or if they have largescale claims domestically for tax dispensations, refunds, subsidies etcetera and obviously with the unprecedented amount of Government support that has been provided in this pandemic, there’s an awful lot of pressure on Customs and the Revenue to recover tax as fully as possible and you mentioned some of these in your introduction, Matthew.  And there’ve been assessments, actually, by the National Audit Office which have concluded that there are high levels of fraud within these applications for various types of relief, partly because the support schemes were quite rushed when they were brought in, in late spring, and so Government has indicated that it’s going to be a priority once the immediate crisis has passed to recover all of that tax but it’s not only HMRC that are looking into tax fraud, the SFO (Serious Fraud Office), National Crime Agency as well are also interested in prosecuting Covid fraud.  The NCA, where there’s a criminal gang or organised crime are involved, and the SFO when the sums involved are in the millions. 

Matthew Ewens, Managing Associate

White Collar Crime, Mishcon de Reya

Thanks, and Paul, what are the areas of concern in relation to the Covid-19 support packages and what has the Government done so far?

Paul Noble, Partner

Tax Disputes, Mishcon de Reya

Well, as you’ve already alluded to, the main issue now is compliance in relation to the Coronavirus Job Retention Scheme, otherwise known as Furlough Scheme.  You have to remember that this support scheme was brought in very quickly at the outset of the pandemic, with the aim of enabling businesses to retain their employees but as it was brought in and administered by HMRC, it works in a similar fashion to the Self-Assessment Tax system, i.e. claim now and check later.  The quick introduction and ease of use have both led to mistakes in claims and, more seriously, fraudulent abuse of the scheme.  The most common seems to be where employees, or employers sorry, made claims in respect of employees that continued to work.  In early September, HMRC reported that they had received 8000 reports of fraud on these schemes from whistle-blower employees and was investigating some 27,000, what they term ‘high risk’ claims.  As a result, it was aiming to conduct something in the order of about 10,000 investigations by the end of the year.  Whilst actually that might be a bit of a stretch, I think it’s a, you know, a good indicator of the seriousness with which HMRC are taking the matter.  Alive to the fact that mistakes would be made, HMRC introduced an amnesty period in which businesses could come forward and disclose any potentially erroneous claims made under the scheme without the risk of facing any penalties.  For most businesses, that amnesty period expired in October so any errors discovered now, either through HMRC investigation or though self-reporting, will be subject to penalties that could be up to 100% of the amount claimed.  Quite draconian.  As companies that participated in the scheme are required to keep records for a period of five years or so, you know this is a risk that many businesses will now be carrying for quite some time and I think, you know, without careful management, the discovery of errors or abuse could leave questions in HMRC’s mind as to the overall tax compliance of a business and its ability to deal with its tax affairs and other issues correctly, especially in the areas of VAT and Pay as You Earn. 

Jo Rickards, Partner

White Collar Crime, Mishcon de Reya

Yeah, Matthew, I mean HMRC has already indicated they are taking these issues really seriously and there are real risks for anyone accused of fraudulent use of the Government support schemes.  I mean, HMRC made its first furlough fraud arrest as early as July which was pretty soon after the scheme had been implemented and they had arrested an individual who was suspected of fraud in the region of £500,000 for furlough fraud and that was the allegation, alongside other fraud and money laundering offences and there have been some other arrests since.  In August, someone else was accused of committing fraud and money laundering and were arrested in relation to the Bounce Back Loan Scheme and in September this year, a company director was arrested for claiming up to £70,000, I think, under the same scheme so it just shows that these are markers really to show how seriously it’s being taken and I think, you know, as we go into next year, we’re going to see these cases increasing, there’s going to be lots of them. 

Matthew Ewens, Managing Associate

White Collar Crime, Mishcon de Reya

That’s really interesting.  What advice would you give a client that has either missed the amnesty boat or comes under investigation, Paul?

Paul Noble, Partner

Tax Disputes, Mishcon de Reya

Well, Matthew, I think in both sets of circumstances actually the most important thing would be to take advice.  Advice on how to deal with the matter, how to mitigate penalties and how to ringfence the issue without any investigation being extended into other issues.  In the case of making a disclosure, how this is undertaken and who is contacted within HMRC needs to be considered extremely carefully to minimise risk.  The benefits of disclosure can’t be underestimated and range from the ability to negate the risk of prosecution through to the mitigation of the penalties charged. 

Matthew Ewens, Managing Associate

White Collar Crime, Mishcon de Reya

And aside from the issues with the Coronavirus Job Retention Scheme, what overall effect do you think the pandemic will have on HMRC’s compliance activity?

Jo Rickards, Partner

White Collar Crime, Mishcon de Reya

Well even before the pandemic, you know, in order to carry out its functions effectively, HMRC had many powers which were pretty extensive.  They’ve got the ability, for example, to demand access to information both here and abroad and it means that an investigation can be very intrusive, time-consuming and costly for whoever is being looked into and there are lots of forms that HMRC investigations can take, they don’t have to be criminal and a lot of them are civil but in terms of criminal investigations, obviously they can initiate a criminal investigation pretty much at any time and take that on to a prosecution which involves a trial, possibly appeals etcetera.  So, you know, it’s an expensive process for anyone who is looked into criminally but it’s also expensive, Paul, isn’t it on the civil side?

Paul Noble, Partner

Tax Disputes, Mishcon de Reya

Yep, that’s right.  There’s nothing new in the message of ramping up HMRC compliance activity and you know, in what seems a lifetime ago and before he was famous, or as famous as he is now, the Chancellor, Rishi Sunak, delivered his Budget at the beginning of March and in that he heralded the work that the Government had undertaken to tackle avoidance, evasion and non-compliance and announced additional measures designed to raise an additional 4.7 billion of tax between this year and 2024/25 and I suppose that anybody that keeps up with the economic aspects of the pandemic will soon realise that such an amount would represent but a mere drop in the ocean compared to the overall costs that the Government have faced.  Support through the furlough scheme alone has cost in excess of 39 billion, therefore faced with such difficult choices of how to raise taxes in a recovery economy, you can certainly expect HMRC to be ramping up their activities even further, as well as the familiar areas that they will target, the pandemic has given new opportunities for them to look at, for example, tax residency.  Many people found themselves spending large chunks of 2020 away from where they are expected to be, not only working from home rather than in the office but also staying in and working in countries which they didn’t plan for.  Whilst HMRC issues guidance on this, it doesn’t provide a free pass for individuals in avoiding potential UK tax residency issues because of Covid-19.  This is just one example of where we might see further HMRC scrutiny moving forward but overall I think we can expect to see increasing enforcement action in all areas, stretching from corporates to high net worth individuals and in a variety of industries too.  Investigations will stretch from the usual interventions we see from HMRC through to using some of the newer tools at its disposal such as enforcement of the corporate criminal offence which we’ll discuss, I guess, in a short while. 

Matthew Ewens, Managing Associate

White Collar Crime, Mishcon de Reya

So what advice would you give clients that have concerns about their tax compliance?

Paul Noble, Partner

Tax Disputes, Mishcon de Reya

I think the best advice, you know, is quite clear and simple and that is to take the time now to look at your affairs, to correct any mistakes and to disclose before HMRC ratchets up their enforcement activity.  Overall, the last few months, through lockdown and beyond has brought a greater risk of errors in tax accounting and lapses in compliance due to additional pressures on businesses, staff being furloughed, new issues to be concerned about and additionally in the wake of the pandemic, businesses have shifted some of their focus onto new geographies or markets and this, you know, can bring in unforeseen implications for tax, accounting and compliance.  All these factors mean that there is a need for business to be extra cautious about their tax compliance obligations now and moving forward.  So, as I said at the outset, it goes without saying that risk assessment is key.  Understand your weaknesses and the way that these may be viewed by HMRC are absolutely fundamental in terms of repairing and correcting any errors. 

Matthew Ewens, Managing Associate

White Collar Crime, Mishcon de Reya

Great, thank you.  So, HMRC’s ultimate sanction, as we know, is criminal investigation.  Jo, can you assist with how they go about this?

Jo Rickards, Partner

White Collar Crime, Mishcon de Reya

Yeah, of course.  Well, there are a number of potential criminal activities that HMRC can look into around Covid fraud, I mean they could look at fraudulent tax evasion, money laundering and also there’s corporate failure to prevent the facilitation of tax evasion and it’s got a broad range of powers and it can deploy them pretty much at most stages of the criminal investigations so, they can undertake surveillance, they can intercept communications, they can obtain search warrants and orders compelling tax payers to provide material, of course they can arrest and if they have arrested somebody, they can carry out a search of their premises and most importantly, they can disrupt by freezing assets under the Proceeds of Crime Act, for example by applying for restraint orders or even account freezing orders to freeze assets in place whilst the investigation is pending and these powers aren’t just there on paper, HMRC uses them regularly.  Before the lockdown, actually, there was a steep rise in the number and the intensity of their criminal investigations, for example, they’ve got 1,500 officers who are authorised to make arrests and, you know, they are going to use those people to go out there and to start shaking the tree, really, to get back this money that they think has been wrongly applied for or fraudulently applied for and at the moment, HMRC’s really refraining from taking action save for the most serious and fraudulent cases but in due course, as I mentioned earlier, these pressures, combined with the obvious fraud risk in many of the schemes the Government’s rolled out, will mean that there are going to be lots more criminal investigations by HMRC to get back that tax and penalties, and to prosecute those who they consider to have really fraudulently made claims or taken advantage of the schemes. 

Matthew Ewens, Managing Associate

White Collar Crime, Mishcon de Reya

So, what recent actions have we seen HMRC taking as far as criminal investigations are concerned?  And how do you anticipate this developing as the pandemic evolves?

Jo Rickards, Partner

White Collar Crime, Mishcon de Reya

Well, I think the very interesting aspect of this and we know from Freedom of Information and other public announcements, is that actually they are starting to ramp these investigations into the corporate criminal offence and three of those have opened since July, and these are cases where a company can have a liability for either its employee or an associate that has helped somebody evade tax so, where the company doesn’t have in place reasonable measures to stop that from happening, then the company itself can be charged even though it might not have any interest in the sort of underlying tax fraud, and this is a relatively new offence which was brought in a couple of years ago and there are in fact some investigations underway at the moment, so there are these thirteen cases at the moment that they are looking into, three of which were opened since July, so that’s you know, they’re quite current.  A business can of course defend itself down the line by demonstrating that it had in place these reasonable measures but that’s something I want to talk to you about later, I think, in relation to what companies can do now to try to avoid any vulnerability under this particular act but to answer your question, we know that there are another eighteen cases which are referred to as ‘live cases’ which presumably are being assessed at the moment and they’re not business sector specific, they cover a variety actually of sectors, including financial services, oil, the construction industry, labour provision and also software development so, you know, HMRC is looking under a lot of stones and casting its net quite wide. 

Matthew Ewens, Managing Associate

White Collar Crime, Mishcon de Reya

I see.  So, given that HMRC has such wide-ranging powers to investigate and prosecute, what can taxpayers do to best respond to an HMRC investigation?

Jo Rickards, Partner

White Collar Crime, Mishcon de Reya

Well, from my point of view, I think they need to assess very quickly whether they have any vulnerability and if they are able to do that and quantify the numbers then there may be an opportunity approach HMRC and discuss a civil settlement and of course companies that might have a vulnerability or might be, you know, in any of these sectors that are being looked at, at the moment, they need to assess, first of all they need to see whether they do have in place some proper procedures to meet the risk but of course there’ll be an increased risk with people working from home and that kind of thing so, companies need to make sure that their policies now match there circumstances and that they are in place and so they, the company, would have a defence down the line if the Revenue ever suggested that they had failed to prevent the fraudulent evasion of tax by somebody else.  But even if you are on the wrong end of a search warrant and it looks like HMRC are pretty advanced in their investigation, it’s not impossible but a lot more difficult to turn that into a civil outcome but the stakes are high and, you know, you need to get in touch and evaluate, really.  Paul, what do you think?

Paul Noble, Partner

Tax Disputes, Mishcon de Reya

Yeah, I think that’s absolutely right and I think that one of the main issues that tax payers face is that HMRC is pretty unique, it has very particular processes that it follows and these are consequently very complex so therefore in terms of helping your business through any issues with HMRC, you need to be looking at instructing advisors that have an understanding of how HMRC works, the intricacies that they use, the powers that they have and therefore being able to leverage the experience that your advisors have in order to build a positive relationship with HMRC, a good rapport, a good working understanding and this, you know, will then ultimately allow them to respond quickly should HMRC decide to take adverse steps against them and this, you know, can be very essential when you are facing time-sensitive processes, time-sensitive actions such as freezing orders and search warrants.  So, building up a good rapport, a good understanding and understanding how HMRC works, is absolutely fundamental. 

Jo Rickards, Partner

White Collar Crime, Mishcon de Reya

Yep and for those businesses that haven’t really addressed their corporate crime risk, they… I would just advise them to look at this without delay and there is some guidance on the HMRC website so, you know, the bones are there as to what they have to be looking at and what their policies need to address and if they need any help with that risk assessment or any evaluation of their existing policies then of course they can give us a ring, we’d be very happy to help them. 

Matthew Ewens, Managing Associate

White Collar Crime, Mishcon de Reya

Great.  With such a fast-moving and truly current area, we expect to see further developments over the coming months and so we intend to give an update in another podcast earlier in the New Year.  For now, I’d like to say a huge thank you to Jo Rickards and Paul Noble for joining me for this Mishcon Academy Digital Sessions podcast.  I’m Matthew Ewens and in the next episode, my colleagues from the Employment team, Mark Levine and Neil Sharpe, will be discussing issues relating to bonus payments. 

The Digital Sessions are a series of online events, videos and podcasts, all available at mishcon.com and if you have any questions you would like answered or suggestions of what you would like us to cover then do let us know at digitalsessions@mishcon.com.  Until next time, take care.

The Mishcon Academy Digital Sessions.  To access advice for businesses that is regularly updated, please visit mishcon.com.

Mishcon Academy: Digital Sessions are a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals today.

In this Mishcon Academy: Digital Session podcast, our White Collar Crime team Partners Jo Rickards and Paul Noble, and Managing Associate Matthew Ewens, discuss tax investigations in the context of COVID-19 and what to expect in the coming months as HMRC look to redress the balance sheet, as well as how to put you and your business in the best position.

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