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August's round up of the latest tax investigation news and cases:
Her Majesty's Revenue and Customs (HMRC) received almost 165,000 tips from the public regarding potential tax avoiders during the 2024-25 tax year, representing a significant increase in whistleblower activity. However, despite record numbers of reports, the quality and value of information appears to be declining.
HMRC received 164,670 anonymous tips through all available channels during 2024-25, marking a 9% increase from the 151,763 reports received in 2023-24. However, the total payouts to whistleblowers decreased substantially, with only £852,438 distributed compared to £978,256 in the previous year—a 13% decline.
Based on these figures, the average payout per tip would amount to approximately £5, highlighting concerns about the effectiveness of the current whistleblowing system.
Andrew Park, a tax investigations partner at Price Bailey, warned that the declining payout values indicate HMRC is being "inundated with more low-value or unverifiable tip-offs." He noted that the tax authority is receiving "a lot more exaggerated and malicious tip offs because it has become so easy to complete the process."
The current system appears to be falling short of its potential as an effective tool for closing the £5.5 billion tax fraud gap that HMRC aims to address.
Park emphasised the need for fundamental changes to the reward structure, stating: "The current reward system lacks both scale and clarity. If HMRC wants informants to deliver high-value intelligence, it must rethink how it rewards risk and insight. A transparent, percentage-based system - like the one used by the IRS - would offer real incentives for exposing major fraud. The new whistleblowing regime could be a game-changer, but it must balance the right incentives with selectivity to avoid flooding the system with more noise."
The US Internal Revenue Service (IRS) operates a significantly more generous system, paying between 25% and 30% of any tax recovered from cases to whistleblowers. Park believes HMRC and the UK government should draw inspiration from this approach to create stronger incentives for reporting large-scale tax fraud.
"HMRC makes payment for tip offs on a case-by-case basis, determined by discretion rather than a fixed percentage of recovered tax," Park explained. "There's no published formula linking the quality of intelligence to the tax revenue secured, which means whistleblowers cannot predict whether their efforts will be rewarded. This ambiguity erodes motivation, particularly in complex fraud cases where whistleblowers may be insiders such as employees."
Park also highlighted that the lengthy timeframes for HMRC to open and close tax investigations serve as a deterrent to potential whistleblowers. He noted that the IRS has begun implementing partial payments in cases that can be disaggregated, such as when fraud cases involve multiple taxpayers and one settles early.
"Anything HMRC can do to make its reporting system more accessible and transparent would be welcomed," Park added.
The effectiveness of robust incentive systems is clearly demonstrated by IRS performance data. In the last financial year, the IRS paid out $123.5 million (£91 million) to whistleblowers, which directly led to the recovery of $474.7 million (£350 million) in tax revenue, establishing a clear correlation between incentivising whistleblowers and successful tax recovery.
In March, James Murray MP announced that HMRC and the government would begin rewarding whistleblowers in a manner similar to the IRS system. This announcement comes after payments have been steadily increasing over the past five years, with a 63% increase between 2018/19 and 2019/2020, and payments having almost doubled since then.
The current situation presents both opportunities and challenges for HMRC's tax compliance efforts. While the volume of tips demonstrates public engagement with tax enforcement, the declining quality of information suggests that system reforms may be necessary to maximise the effectiveness of whistleblower programmes in combating tax evasion and fraud.
A payroll company has successfully won its appeal at the First Tier Tribunal (FTT) against more than £9 million in penalties and VAT assessments after HMRC failed to prove the company was aware of VAT fraud within its supply chain.
Red Rose Payroll (RRP) challenged HMRC's application to deregister the company for VAT, along with a substantial VAT assessment of £7,191,003 and a penalty of £2,157,300. The case centered on HMRC's assertion that RRP "should have known that it was participating in transactions connected with the fraudulent evasion of VAT."
Judge Malek established that if HMRC failed to prove this knowledge, the penalty would have to be dismissed entirely.
The tribunal addressed two fundamental questions: whether RRP knew or should have known that the transactions in question were connected with fraudulent VAT evasion, and whether the transaction chains formed part of an orchestrated scheme to defraud the revenue.
HMRC's primary evidence focused on RRP's sole supplier, WM, which was operated by Charlie Vause and Ian Hamilton. When RRP claimed more than £7 million in input tax, this supplier was listed on the deliberate defaulters list—a fact HMRC argued should have alerted RRP to potential fraudulent activity.
Janet Walmsley, one of RRP's directors, provided crucial testimony to the FTT. She stated she had no knowledge of possible supply chain fraud, explaining she had not encountered such issues previously. Walmsley revealed she had initially met Vause in 2016 as work colleagues, but in 2019 he approached her with a business opportunity.
Following this meeting, Walmsley and her husband Stuart incorporated RRP. Vause subsequently introduced RRP to UK Professional Services (UKPS), though this relationship was abandoned when the purported director was not listed on Companies House, while his two young sons were registered as directors.
Vause then introduced the Walmsleys to Hamilton, who claimed expertise in payroll processing and represented himself as an accountant, though Walmsley admitted to not verifying his qualifications.
According to Walmsley's testimony: "It was agreed, she states, that Mr Hamilton and his team (including, apparently, Mr Vause now) would be responsible for client acquisition and relationship management, whilst RRP would provide the underlying payroll processing and administrative support."
During cross-examination, Walmsley made several significant admissions. She acknowledged knowing that Hamilton was not the legitimate director of WM but maintained he appeared to control operations. She had never met the actual director, Stephen Davis, which she conceded was a "red flag."
When questioned about RRP's acceptance of payments from third-party companies for services delivered to WM, Walmsley explained that Hamilton operated multiple companies and such arrangements "would not be unusual in the industry."
When WM was deregistered for VAT on 27 January 2022, RRP responded immediately by ceasing all trading with Hamilton and Vause's company.
Judge Malek noted: "She denied any prior knowledge of VAT irregularities and maintained that all payments made to WM prior to 27 January 2022 were made in good faith."
Under cross-examination, it emerged that RRP had continued dealing with WM even after the latter's VAT deregistration. Walmsley explained that payroll processing had to continue to pay thousands of workers, but accountants had been consulted and her understanding was that RRP should not transfer any VAT to WM following the deregistration notice.
"She had, upon receiving notice of WM's de-registration for VAT telephoned Mr Hamilton who had assured her that he 'would sort it out,'" Judge Malek observed.
Walmsley maintained she had no knowledge that any transactions were connected to fraud, stating that the "arrangements appeared to her to be consistent with standard industry practice in outsourced payroll services" and there was "no reason to doubt the legitimacy of WM's operations."
Colm Kelly, barrister for HMRC, argued that "Walmsley failed to carry out proper due diligence into WM and Mr Hamilton." He emphasised that Walmsley had accepted it was best practice to identify shareholders and directors before conducting business, and had she done so, she would have discovered that Hamilton was neither a director nor shareholder of WM.
Kelly further noted that "Walmsley had made no effort to contact Davis and Vause had not carried out any due diligence into WM or Mr Hamilton either."
Additionally, Kelly argued that "Walmsley's position is not helped" by her awareness that Hamilton operated several businesses without being a director or shareholder in any of them.
Judge Malek acknowledged significant failures in due diligence, stating: "It seems, therefore, fairly clear to us, and we agree with the submission, that RRP failed to carry out proper due diligence on WM in two key respects. Firstly, RRP failed to properly identify who it was providing services to. Secondly, it failed to establish who it was being paid by or attempt to discover the reason behind third party payments."
However, the FTT Judge rejected HMRC's assertion that Walmsley had "background knowledge about supply chain fraud in the labour industry."
Judge Malek added: "We reject the notion that the appellant's decision to continue to trade with WM after being notified of WM's deregistration indicates that RRP knew or ought to have known that its transactions with WM were connected to fraud."
The tribunal's decision was influenced by several factors. When HMRC initially contacted RRP about WM's deregistration, it was based on HMRC's belief that WM had committed VAT fraud, not on established fact. Furthermore, RRP acted promptly by refusing to transfer any VAT to WM after receiving notification of the deregistration.
Judge Malek concluded: "We have come to the inevitable conclusion that the respondents [HMRC] have failed to establish the burden upon them to show that the appellant's transactions with WM were connected with VAT fraud or that the appellant ought to have known that they were so connected."
The appeal by Red Rose Payroll was allowed, representing a significant victory against HMRC's substantial penalty and assessment claims totaling over £9.3 million.
A group of mini umbrella companies has lost a multimillion-pound appeal at the Upper Tribunal against being deregistered by HMRC after extensive VAT fraud was identified within their operations.
In April 2024, HMRC secured a landmark victory against Elphysic & Ors when it was determined that mini umbrella companies (MUCs) had been established specifically to claim improper tax advantages. These benefits included VAT and National Insurance advantages, resulting in HMRC removing the appellants' VAT registration status.
The case subsequently proceeded to the Upper Tribunal, where the appellants—Elphysic Limited, Phyarreidon Limited, Rosscana Limited, and Zraytumbiax Limited—engaged two King's Counsel, Daniel Margolin KC and David Bedenham KC, in an attempt to overturn the First Tier Tribunal (FTT) ruling.
This decision in favour of HMRC will impact thousands of mini umbrella companies operating similar schemes. While there is no standardised model of MUC fraud, these arrangements typically involve dividing workforces across multiple small companies to evade tax obligations and exploit government incentives such as employment allowance and the VAT Flat Rate Scheme.
Giles Butterworth KC provided legal opinion for the appellants in 2016, stating: "There is a reasonably good case that if the factual premises set out in the Instructions and this Opinion are established and the proposed structure is properly implemented in practice, the SCIs [MUCs] will be able to show that they are unconnected with each other and/or other persons within the proposed structure and consequently the EA and the FRVAT [FRS] scheme will be properly available."
Goodfellow also advised that directors should purchase shares in their companies "at a price that reflected the anticipated return but that they should participate in the profits whether by way of director's fees or dividends or a mixture of two."
Although only four companies were appellants in this case, HMRC believes they were "part of a scheme involving over 18,000 other mini umbrella companies to defraud the public revenue of hundreds of millions of pounds."
At the initial FTT appeal, the judge concluded: "The appellants in this litigation are participants in an organised and contrived structure with the purpose of defrauding the Revenue by claiming tax benefits to which they were not entitled. These tax benefits include registration for VAT, the use of the VAT Flat Rate Scheme (FRS), and the use of the employment allowance (EA). The respondents estimate the tax lost from the scheme as a whole to be over £260m."
The appellants were granted permission to appeal the FTT decision on five specific grounds:
Ground One: The FTT "erred in holding that HMRC had adequately pleaded and particularised their case that the MUC scheme as a whole was and is itself fraudulent."
Ground Two: This was divided into sections A and B. Section A alleged that HMRC based their case on fraud being "organised/operated by named individuals," while Section B claimed the "FTT found that HMRC's pleaded case did not contain 'the particularisation necessary to enable us to identify the fraudster or fraudsters behind the MUC scheme'."
Ground Three: HMRC allegedly failed to provide "adequate reasons for its central conclusion that the 'organisers of the MUC scheme must have known that the lead appellants were not entitled to use the FRS … and only entitled to claim EA in consequence of avoidance arrangements'."
Ground Four: The legal representatives argued that "the FTT's central conclusion that the 'organisers of the MUC scheme must have known that the lead appellants were not entitled to use the FRS … and only entitled to claim EA in consequence of avoidance arrangements' was not one properly open to it."
Ground Five: The appellants contended that the FTT erred in determining they were in control or exercised "dominant influence" over the scheme organisers.
The appellants also contested HMRC's position that MUC directors should have known they were "facilitating the organisers of fraud."
Throughout the FTT hearing, HMRC's legal team maintained "that it was plain from the outset that the case was one of fraud," though the directors were not directly accused of fraudulent involvement.
Ground One: Upper Tribunal Judge Eason Rajah KC agreed with the FTT ruling and dismissed this ground of appeal.
Ground Two: The claim that proceedings were "unfair" was also rejected by Rajah, who stated: "The lead appellants claim that proceeding in this way was procedurally unfair. We are unable to accept those submissions."
The tribunal determined that HMRC's case pleading was "sufficient to make the lead appellants aware that a fraud was being alleged" and found no "error of law" from the FTT as alleged by the appellants.
Grounds Three and Four: These were considered together due to "very significant overlap" between them.
Daniel Margolin KC, representing the appellants, argued: "In circumstances where the organisers of the MUC scheme had not been identified in the SOC [statement of case], the FTT could not properly then conclude that the unidentified organisers 'must have known' that the lead appellants were not entitled to use the FRS as a result of their association with the organisers and were only entitled to claim the employment allowance in consequence of avoidance arrangements."
Judge Rajah characterised this as a "perverse finding" and stated "there was no reason to support it."
Margolin further argued that the actual fraudsters were the scheme promoters, citing numerous references to "organisers/facilitators" throughout the FTT judgment. The Upper Tribunal found this argument "unconvincing," and both grounds three and four were rejected.
Ground Five: The final ground, challenging the FTT's finding that appellants were "dominant influences of others," was also dismissed. Judge Rajah concluded that "the FTT was entitled to reach the findings that it did in relation to the fraudulent nature of the MUC scheme."
All grounds of appeal were dismissed, leading to the conclusion that HMRC "were entitled to de-register the lead appellants," according to Judge Rajah.
The decision represents a significant victory for HMRC. Richard Las, Director at HMRC's Fraud Investigation Service, commented: "We are pleased the tribunal agrees the MUC model used in these cases is fraudulent. MUC fraud creates an uneven playing field for employment agencies and businesses who follow the rules. We continue to use our civil and criminal powers to tackle those who are facilitating this type of fraud."
This landmark ruling establishes important precedent for HMRC's continued efforts to combat tax fraud through mini umbrella company structures, potentially affecting thousands of similar arrangements across the employment services sector.
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