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July 2020 Tax Investigation Round Up

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

  • HMRC plans to tackle online VAT evasion
  • Chancellor grants tax authorities new powers
  • A look ahead to post COVID-19 tax investigations

HMRC plans to tackle online VAT evasion

When we reach the end of the Brexit period on 31st December 2020, we can expect to see a raft of tax reforms ushered in to enable HMRC to better tackle the avoidance of foreign e-commerce VAT online.

The planned reforms are designed to tackle the tax evasion being carried out by foreign internet retailers to the tune of an estimated £1.5bn, and in so doing, create a more equal playing field for UK based online retailers and high-street stores. Further to that, the reforms are also aimed at making speed and efficiency improvements to the process of handling imports of e-commerce goods, not just for tax authorities, but also for consumers and retailers.

Some of the key measures that have been proposed to achieve these objectives will result in the UK mirroring the e-commerce VAT reforms the EU have planned that are set to be introduced in 2021 after postponements. Australia have a similar package already in place following their reforms in 2018.

For some time, it has been argued that UK retailers are at a distinct disadvantage both online and offline as a result of EU LVCR scheme. HMRC appear to be taking the opportunity to correct this and level the playing field as the UK exists the EU.

The ending of LVCR relief will see the end of Chinese and other foreign merchants enjoying VAT-free selling in the UK.

Another potentially significant measure that has been proposed as part of the wide reaching reform is to move the VAT rights and obligations to the marketplaces that facilitate the seller transactions. This would make the marketplaces the 'deemed supplier' for any VAT that is owed as part of an e-commerce transaction.

Most of the proposed changes are not without their challenges when assessing their practical implementation. A situation further complicated by parallel concerns around the limited time available to HMRC to carry out the implementation and the intricacies of making such reforms alongside the Northern Ireland Brexit dual-border VAT regime.

Chancellor grants tax authorities new powers

After a period of relative inactivity during the outbreak of COVID-19 and the UK lockdown, all indicators suggest HMRC are now ramping tax investigation activities back up to prior levels.

Over the course of last year, figures indicate a total of 337,000 tax enquiries being undertaken by HMRC. Of these, 105,000 came in the first quarter of 2020 leading up to lockdown. As these figures emerge from recent analysis, the Chancellor has announced the introduction of new legislation to enable tax authorities to better target individuals and businesses who they suspect have wrongly claimed support payments issued COVID-19 aid.

A number of monetary aid schemes were launched as the country went into lockdown to ease the financial burden on British businesses and tax payers, including the Self Employment Income Support Scheme and the Furlough Scheme.

HMRC are expected to make enquiries into suspected cases of wrongful claiming in their usual manner, issuing letters to request information from the individuals and businesses concerned. In addition to making requests for information, investigators are expected to visit business premises in person and interview company directors where it is deemed necessary.

As with all HMRC enquiries, a request for information issued by a tax investigator does not automatically mean wrongdoing has taken place. HMRC will be looking to ascertain the necessary evidence to support their initial suspicions, which could arise from something as simple as an honest mistake made on a previous tax return.

A leading firm of UK tax advisors indicated that HMRC are increasingly using 'open source' information to conduct the early stages of their investigations, which can include social media profiles, blogs, websites, and public records held on websites like Companies House.

The outcome of these enquiries will vary significantly, from dead ends for HMRC where there is no evidence of wrongdoing, through to individuals and businesses having to re-pay owed tax, pay fines and penalties, or even be progressed to a full investigation if criminal activity is suspected, which can result in prosecution.

Tax payers currently have some breathing space to get their tax affairs in order whilst HMRC are still primarily focused on administering COVID-19 schemes. Where an individual suspects corrections need making in their tax matters, they are advised to first speak with a tax professional who can help them navigate the process with HMRC.

A look ahead to post COVID-19 tax investigations

By any standards the impact of COVID-19 on the UK economy has already been substantial. The outbreak of coronavirus has seen more than eight and a half million workers furloughed by their employers. A further 2.5 million self employed individuals received financial support from the government.

These costs have already amounted to a staggering £17.5 billion, with the deficit for the year expected to round out at £300 billion. The perfect storm of a huge reduction in employment incomes at the same time as deferred tax payments has left the treasury down by as much as 50% on income from UK tax receipts.

This would suggest that there will be a renewed intensity from the government and HMRC to recoup these loses where they suspect financial aid has been channeled to individuals and businesses who did not qualify for the type of support or level of support they claimed through one of HMRC's various online, self-service platforms.

The individuals more likely to attract HMRC's intensified interest however, are those not fully declaring the tax they owe on their annual returns. It is this group that is most easily identified by HMRC thanks to the wealth of data and technology they are now utilising to carry out investigations.

One of the strategies being used by HMRC been made possible by the huge shift towards electronic payments and away from cash in light of coronavirus being transferable on bank notes. This has shined a spotlight on those businesses that have under-declared tax for a number of years, who are now almost exclusively taking electronic payments which are impossible to hide.

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