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April 2021 Tax Investigation Round Up

April's round up of the latest tax investigation news and cases:

  • Illegal money service business owner ordered to pay back nearly £1m
  • Tax debt owed to HMRC trebles to £65bn
  • Budget gives HMRC investment of over £100m to combat Covid fraud
  • Online promoters dominate tax avoidance market

Illegal money service business owner ordered to pay back nearly £1m

Shunjian Jiang had been operating an unregistered, unregulated money service business and lived a lavish lifestyle off the profits. He was arrested in August 2016 after tax investigators looked into his affairs.

Jiang was living in London and was using his business to buy upmarket fashion items and then selling them on to his customers in China who purchased the items with the Chinese yuan. He promoted his illegal sterling-to-yuan exchange service in online forums to people in the UK.

Jiang purchased a £700,000 house, £25,000 worth of designer watches, £41,000 worth of designer clothes and had £220,000 in his bank account. All of which are under restraint or have been seized.

He has been ordered by the courts to pay a £980,059 confiscation order within three months or face the alternative of spending five years in jail.  

Nicola Dunk, assistant director, Fraud Investigation Service, HMRC, stated: ‘Our work doesn’t stop at conviction and HMRC will always seek to reclaim criminal money and assets, which are redistributed into the public purse to help fund vital services such as hospitals and schools.

‘Jiang showed a complete disregard for the rules and by operating an unauthorised MSB was funding his lifestyle at the expense of honest businesses and the taxpayer. With this confiscation order we are now recovering money he made from his crime.’

Tax debt owed to HMRC trebles to £65bn

According to Pinsent Masons, debt owed from UK businesses and taxpayers to HMRC has significantly trebled to £65.5bn from £19.3bn in 2019 due to late payments during lockdown.

Subject to immediate debt collection, an estimated £26.6bn of that debt is in arrears. Fraudulent claims for coronavirus roughly support £35bn of the total debt, these were made in relation to emergency policies to help businesses through coronavirus. Such policies were deferred VAT payments. A total of £3.9bn of the debt has been deferred through Time to Pay arrangements that were made with HMRC.

Discussed in the Budget earlier this year, HMRC was given an extra £100m to pay for 1,265 tax staff to focus on fraudulent Covid claims. HMRC however is currently unable to recover debt under certain enforcement due to the moratorium on insolvency action. Speculation states that the moratorium may be extended however it is unlikely to extend beyond June 2021.

Pinsent Masons state that once the moratorium and lockdown ends, there will be a large amount of pressure to improve public finances to help pay for coronavirus support schemes. In order to do this debt recovery teams will be on the case for outstanding payments.

Steven Cottee, partner at Pinsent Masons said that HMRC will be aware that pushing businesses into insolvency could be counterproductive as the unintended consequences would lead to other strains on the public purse, particularly if the insolvency results in large scale redundancies. If an insolvent business is unable to pay its employees, the employees can pursue their redundancy payments direct from the government.

The position is further complicated as from 1 December 2020 HMRC is now treated as a preferential creditor in any insolvency, meaning it is entitled to be paid ahead of unsecured creditors and floating charge lenders. Theoretically, HMRC could petition to wind up a business, appoint a liquidator who could sell the assets of the business, with only HMRC being paid and leaving no other money to pay the other creditors, such as suppliers and banks.

Cottee also added that the combination of unprecedented debt due to HMRC as a result of the Covid pandemic, together with the return of Crown Preference, gives rise to an interesting dilemma for HMRC.

HMRC will have a difficult balance to strike in order to protect taxpayers' interests whilst also looking to minimise the number of insolvencies,’ Cottee said. ‘HMRC will need to ensure it is recovering as much money as quickly as possible but also look to support viable businesses where it can. If HMRC moves quickly it may recover more money in the short-term for the UK taxpayer, however it could result in more insolvent businesses which the government will be keen to avoid.

'It will be vital for the government to ensure that sufficient resources are in place to enable HMRC to perform this very difficult balancing act.

‘HMRC will need to have enough personnel with the necessary skills and qualifications to deal with these immense challenges and also be open to engaging with restructuring professionals to ensure that the interests of taxpayers and the UK economy are equally protected. The scale of the challenge for HMRC is unprecedented in recent times.’

Budget gives HMRC investment of over £100m to combat Covid fraud

Earlier this year, it was discussed in the Budget that the government will invest £100m to pay for an extra 1,265 tax officials to focus on tax fraud related Covid claims of an estimated £3.5bn.

The task force will take action in recovering debt from  coronavirus support schemes. Such schemes including the Coronavirus Job Retention Scheme (CJRS) and Self Employment Income Support Scheme (SEISS) to help employees and businesses were abused. With raised awareness of enforcement action, the government hopes that it will deter fraud and strengthen enforcement for Bounce Back Loans.

Andrew Sackey, partner at Pinsent Masons and former head of HMRC’s Offshore, Corporate and Wealthy compliance unit, says the last time HMRC received additional investment to recruit 1,000 staff into the enforcement of tax fraud was in the 2010 Spending Review, and that generated a fivefold increase in the annual prosecution rate in under five years, making HMRC the largest economic crime investigation agency in the UK.

‘The creation of this massive targeted Covid fraud taskforce is a marked shift away from previous lines contained in the tens of thousands of nudge letters that HMRC have issued while focusing on recovery of inappropriate claims, in which they acknowledged that “mistakes happen”,’ said Sackey.

‘It is a clear message that the government is dedicated to ensuring the hundreds of billions of pounds its spent on Covid support does not end up in the hands of fraudsters. This new task force will be looking to specifically address the more serious abuses.

Dawn Register, head of tax dispute resolution at BDO said: ‘Catching tax cheats will be a key part of the government's action to repair the public finances. In a bold move to hire over 1,000 new HMRC investigators, the target is to claw back fraudulent pay outs. Given the speed and scale of the response to Covid-19, it is undoubtedly the case that fraud has increased. HMRC has a rich pool of data to identify suspicious claims and grants, and we expect a flood of new enquiries.

‘Given the switch to online and paperless transactions, this is a new focus to tackle fraud, including on electronic sales suppression and forcing information from digital platforms.  

‘HMRC powers and technology will be further enhanced by additional money and resources for HMRC to recoup money spent during the pandemic. New steps to tackle tax avoidance and evasion are estimated to raise £2.2bn between now and 2025-26.’

There are concerns that the new taskforce does not divert from current HMRC investigations’ work.

Christopher David, counsel in WilmerHale’s UK white collar defence and investigations practice, said: ‘With the government estimating that up to £3.5bn in furlough and other Covid-related financial support may have been claimed fraudulently or paid out in error, it is no surprise that the Treasury is beefing up investment to crack down on criminal behaviour.

‘The level of resources provided to HMRC will be key to the success of the new taskforce, and whilst the figures announced appear significant, it must not result in the loss of staff from the other vital areas that HMRC covers. HMRC investigations already take too long, and the Taxpayer Protection Taskforce may lead to further delays in tax and other criminal investigations.’

Online promoters dominate tax avoidance market

HMRC has confirmed that the tax avoidance market is dominated by specialist online promoters compared to bricks and mortar companies, with accounting firms rarely involved in this sector. They account for around £1.7bn lost in tax as a result of tax avoidance from 2018 to 2019. In the previous 12 month period, this figure was just a quarter of the size.

Latest figures have shown that in 2018 to 2019, 30,000 individuals and 2,000 employers were involved in tax avoidance schemes. The majority of this abuse was due to loan charge arrangements and disguised remuneration. To make this look legitimate, taxable money that someone receives for doing a job has been made to look like non-taxable money to avoid tax due.

An individual will receive their income or earnings as a series of loans. The terms of the loans meant that the recipient was very unlikely to ever have to repay the debt. The loans would generally be made by an offshore trust which has been set up in a tax haven.

Data shows that during the 2018 - 2019 tax year, tax avoidance in the age group of 41-60 years was most prevalent. The data showed that the age group are typically involved with the avoidance for around three years and almost half have been involved in other avoidance schemes.

The sale of tax avoidance schemes has moved almost exclusively online, HMRC said. There are also far fewer promoters than four years ago. The tax authority estimates that there are about 20 to 30 promoters who are behind most of the tax avoidance schemes. These individuals design, manage and organise avoidance schemes.

Professional bodies such as ICAEW, ACCA and the Chartered Institute of Taxation have worked intensively to stop members from any involvement in suspicious schemes. All the UK’s professional organisations strongly prohibit members from creating or promoting tax avoidance schemes.

The issue for the general public is that some of the advertising can be persuasive, claiming that it is not against the law to do so. Promoters advertise using language that sounds convincing and draws clients in assuming they are not doing anything wrong. Price comparison-style websites can be seen to market the schemes. Familiar claims include ‘up to 90% retention on contract income’ and even ‘unprecedented support with HMRC’. HMRC continues to work with the Advertising Standards Authority and online search engines to remove misleading material.

Mary Aiston, director of counter-avoidance, at HMRC states: ‘Over the last six years, the amount of tax the UK loses to avoidance has fallen by around a half. The market has moved away from top accountancy firms and banks selling schemes, to boutique promoters selling online.

‘It’s no longer just about higher-income individuals using investment-based avoidance schemes involving Hollywood films or gold bullion. Instead the market has decisively shifted towards employment-based avoidance schemes, aimed at those with middle income levels, including contractors and agency workers.’

Promoters have been taking advantage of the pandemic to target NHS workers returning to work, whilst other targets are people caught up in the loan charge scandal.

‘You don’t have to be a tax expert to know that an artificial or contrived arrangement that claims to cut your tax bill by 90% is almost certainly too good to be true. Or that an arrangement that requires you to pay big fees to the person selling it, yet very little tax to HMRC, is probably one to steer clear of,’ Aiston said.

The government has been trying to tackle the problem of tax avoidance promoters for some time. Since April 2016 over 20 individuals have been convicted for fraudulent activity and marketing tax avoidance schemes.

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