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January 2021 Tax Investigation Round Up

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

  • HMRC penalties for taxpayer compliance failings increase by 62%
  • Online IR35 tool fails 19% of the time
  • Largest 'big company' tax payment for over a decade
  • PAC warns Bounce Back Loan rushed out too quickly

HMRC penalties for taxpayer compliance failings increase by 62%

At the start of the pandemic early last year (2020), HMRC suspended tax investigations due to focusing their attention on helping taxpayers with emergency coronavirus assistance. This involved helping support furlough schemes and tax deferrals. There was, therefore, a sudden drop in penalties being forced on taxpayers for underpayment or late tax payments.

Due to this slump in HMRC’s usual investigation work, UHY Hacker Young states that penalties fell 36% from £730m to £468m in the year to the end of September 2020.

However, the firm says HMRC collected £34m in September, a huge increase of 62% compared with £21m collected in May. Further increases in penalties are expected as HMRC starts to shift its attention back to compliance work.

Sean Glancy, partner at UHY Hacker Young, comments: ‘The lull in HMRC investigations is largely over. Many accountancy firms are already reporting an increase in HMRC enquiries so if you do have tax that you have avoided or evaded then now is the time to come forward.’

A number of investigations are now focused on the misuse of the government’s support schemes that were offered through the pandemic, including the furlough scheme which was abused by many employers. HMRC have confirmed there are 27,000 high risk cases identified for overclaimed furlough that met the first deadline on amnesty in October 2020.

Glancy said: ‘Businesses that have not come forward under the furlough amnesty should be braced for HMRC to impose the highest penalties that it can. This is exactly the kind of area that HMRC will deliberately impose tough penalties to create a deterrent effect.’

There are large penalties for failing to pay tax that is owed to HMRC, whether this is deliberate or a result of mistakes from careless behaviour. Penalties can rise to as much of 100% of the amount believed to be owed.

Online IR35 tool fails 19% of the time

HMRC created an enhanced version of the check for employment status for tax (CEST) tool in November 2019. This was in response to criticism that it failed to help and support employers and contractors to determine employment status.

However, published statistics show that in almost one in every five cases over the past year, the online tool failed to give a definite answer. Over the period of November 2019 to 24 November 2020, statistics show that of 975,416 CEST uses, 188,719 were ‘undetermined,’ meaning that 19% of employment cases were uncertain.

It is worth noting that over the year, more than half (52%) of those using the online tool were judged to be outside off-payroll working rules or for self employed tax purposes. In comparison 29% were found to be inside off-payroll working rules or employed for tax purposes.

HMRC say that they have been working hard to make the online tool more understandable to reduce user error and consider more detailed information.

HMRC states: ‘CEST produces a determination in the vast majority of cases and HMRC stand behind every result it gives, provided the information is accurate and it is used in accordance with our guidance.

‘To reach a conclusive result in a greater proportion of cases we would need to add in more complex questions, which would add difficulty for the majority of users.

‘In more finely balanced cases, CEST is expected to provide an undetermined outcome and HMRC has provided detailed guidance and dedicated support to help customers make status decisions.’

Largest 'big company' tax payment in over a decade

According to research by PWC for the 100 Group of Finance Directors, the UK’s biggest companies paid £84.1bn in tax during the 2019/20 financial year.

Representing 11% of all government tax receipts, it is made up of £26.9bn in taxes borne and £57.2bn in taxes collected. The data was collected from 97 of the largest companies in the UK prior to the Covid- 19 pandemic.

Tax contributions are expected to have a significant fall in the next tax year as there will be a decline in profits due to the Covid-19 crisis. As well as a drop in economic activity, tax deferrals and business rates relief is likely to impact the contribution. The March Covid support package to the retail, leisure and hospitality sectors alone offered business rates relief to an estimated cost of £10bn.

Largely due to a decrease in fuel and tobacco duties, of the companies surveyed, total tax contribution fell by £0.6bn from the previous year.

‘This survey underlines the contribution of the largest UK companies to the economy and wider society. It’s clear that there are significant challenges to be overcome in the years ahead.

‘Moving to a zero-carbon economy and re-skilling in the age of increasing automation were already pressing priorities which now have to be accelerated against the backdrop of the recovery from the crisis.

‘With the imminent end of the EU transition agreement, now is the time for a fresh assessment of how we create a tax system that addresses those priorities while encouraging investment and providing certainty for the future.’

PAC warns Bounce Back Loan rushed out too quickly

The Public Account Committee (PAC) warns that the Bounce Back Loan Scheme (BBLS) was rushed out too quickly with insufficient checks. They believe that UK taxpayers stand to foot a bill of £26bn to cover potential losses from the mistake.

Potential losses stand at around £15bn to £26bn according to PAC. The government, however, believes the majority of this will be due to credit losses where the borrower no longer has the funds to repay the loan. PAC believes the BBLS lacks the data to assess its economic benefits and levels of fraud within the system.

Within just 24 hours, businesses were able to borrow money when the BBLS was created. The government moved at a fast rate to create this scheme which guaranteed loans, tailored to support small businesses during and after lockdowns.

The BBLS, the Treasury, the Department for Businesses and the British Businesses Bank said due to the delivery speed of the scheme, they have not been able to measure the scheme’s success. Due to the speed of delivery, businesses were required to self-certify their applications and lenders did not need to perform any credit checks.

The report states: ‘Government’s desire to move quickly was based on anecdotal evidence, and a survey in mid-April that concluded one-third of businesses would probably not be able to access enough cash to last more than two weeks of lockdown. Beyond this, no clear estimates were drawn up to consider the cost of not delivering cash to the businesses within this two-week period.

‘The scheme had no business case which means we heard limited evidence of a consideration of how many businesses might be unviable irrespective of the impacts of the pandemic, which business sectors needed support and how much, or the level of losses government might be prepared to bear on the scheme.’

PAC made a point that the Bank does not have any information on how the loans have been spent, however warns that they will look into this during 2021 after the scheme closes. PAC believes this is exposing taxpayers to avoidable and unavoidable risks such as fraud.

The report said: ‘Government does not have a counter-fraud strategy for the scheme and has not identified what types of fraud it will prosecute. The Bank does, nevertheless, have a weekly lender fraud prevention collaboration working group, and conducts “data-analytics” work with the Cabinet Office.

‘Equally, lenders are required to conduct counter-fraud, anti-money laundering and “know your customer” checks on loan applications. The Bank believes that these checks have prevented around 27,000 fraudulent loans that represent £1.1bn but it has no data on scheme fraud levels.’

PAC is disappointed in the government’s failure to assess the impact of BBLS, including businesses that were not able to claim it. This makes it difficult to measure and evaluate its success.

Meg Hillier, PAC chair, concludes: ‘We all hope the BBLS saves a significant number of Britain’s small businesses, who will play a key part in the economic recovery from this pandemic. But despite knowing that it was a case of “when” rather than “if” a serious pandemic hit the country, government didn’t develop plans for how to support the economy.

‘Rushing to get money out of the door after the fact didn’t allow for analysis of how many businesses needed this help, could benefit from it, or could repay it. Dropping the most basic checks was a huge issue that puts the taxpayer at risk to the tune of billions.’

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