May's round up of the latest tax investigation news and cases:
A hearing has been conducted by the Treasury Committee with the National Audit Office in relation to furlough schemes and bounce back loan fraud and the reasons behind the cases.
Chair of the Treasury Committee, Mel Stride opened: ‘The pandemic has created an extraordinary environment, what is your view as to where fraud has been most noticeable and where this has happened?’
Gareth Davies, comptroller and auditor general, National Auditor Office (NAO), stated: ‘One obvious area is employers overstating the furlough scheme – the scheme is vulnerable to employers inflating number of staff, number of claims; the other thing is claiming the money and requiring your staff to work; and third is organised crime, ether coercing employers to make claims or through agents, false agent arrangements with tax agents.
‘For the self employed scheme the controls are a lot tighter and so the opportunities for fraud are much more limited. As the schemes have been extended there is more opportunity for fraudsters to adapt their methods. HMRC has responded with greater awareness of how people are pushing the boundaries of the schemes, and has introduced tighter definitions of how businesses and individuals are ‘adversely affected by the pandemic.
‘There have been improvements in control – so for example, since January HMRC has been publishing lists of employers claiming furlough. That transparency was a deterrent for future fraud. That is an area where control has improved, but increasing complexity certainly makes error more possible and there is more opportunity for fraud.’
It is assumed that there is 5-10% fraud on the furlough scheme and 1-2% of fraud for the self employed scheme. HMRC’s taskforce has been focusing on this area and the specialist team has so far contacted around 10,000 employers to provide information on the use of their furlough schemes.
Davies continued: ‘Estimates need to be constantly refined. We have been in dialogue with HMRC on reviewing these estimates. They need to be updated more regularly. Some of the anti fraud measures used on grants are probably more readily used on these schemes.'
Andy Morrison, director, HMRC, at NAO added: ‘Although their [HMRC] approach is designed at getting a robust estimate by the end of 2021, we would like to see updated estimates while the schemes are operating. Almost 10% of people were working in the first phase of furlough while employers had claimed furlough and some people were working part time.
‘Like all fraud, whistleblowing is one of best ways to identify fraud. There’s been a big investment in extra compliance staff at HMRC and that has taken some time to bring people in.
‘It is just worth pointing out that whistleblowing had to be done through an online form until August. HMRC has always made clear to employers that they need to keep records and will be carrying out compliance checks. Most recent figures showed that HMRC were going to check 10,000 companies and more funding was announced in the Budget but we haven’t seen the results of that yet.’
Davies said: ‘HMRC has a good track record on investment in compliance staff, for every pound spent on tax recovery nine in £10 is recovered. But it is unlikely to be so high for CJRS.’
While furlough fraud is one issue affecting the pandemic support package, there are also concerns about abuse of bounce back loans with estimates that between 35% and 60% of bounce back loans may not be repaid.
Davies commented ‘The fraud risk has been elevated by the pandemic and it has affected bounce back loans. This is the area we are most concerned about – there is a credit risk where people cannot pay back loans and in the fraud control area.
‘The big challenge is the way that those schemes were accelerated – this meant that the process was accelerated removing credit checks – this meant that lenders did not go into detail about the provenance of the claims, and also there was a high risk of identity theft for fraudulent claims. These are some of the reasons why bounce back loans were vulnerable.’
As the loans were underwritten by the government, rather than the lenders, qualifying criteria were not as robust as usual. The British Business Bank has been carrying out random sampling work to identify risk levels and this will produce two data streams – those paying back loans and those not, which will give a clearer picture of how to identify risk.
HMRC has reported to have received 975,420 referrals of suspicious contact from the public over the last year. From this amount, 552,885 related to fraudulent tax rebates. This is a huge increase of 71.3% with 2019 recording 569,140 referrals. With criminals targeting the furlough and Covid-19 support schemes, there has been an enormous increase of 1,350% in scams.
In February 2020, reports showed that there were 34,538 complaints of fraudulent activity, with a huge increase of 206% of 105,906 complaints in January 2021.
Figures show that there has been an increase in fraudulent activity relating to Covid-19 financial scams across emails, texts and phone increasing by 51% since March 2020. There were reports for over 19,820 suspicious web pages and 402 Covid related scams were taken down by web providers. There were 2,968 phone numbers reported for HMRC related telephone scams.
An HMRC spokesperson declared: ‘If someone calls, emails or texts claiming to be from HMRC, saying that you owe tax and face arrest, are due a tax refund, asking you to transfer money or for bank or other personal details, it might be a scam. Check gov.uk for our scams checklist and to find out how to report tax scams.
‘Criminals are taking advantage of the package of measures announced by the government to support people and businesses affected by coronavirus. Scammers text, email or phone taxpayers offering spurious financial support or tax refunds, sometimes threatening them with arrest if they don’t immediately pay fictitious tax owed.’
Advice from HMRC has been given to the public to ‘Stop, Challenge, Protect’. This advice is to urge you to pause before parting with information or money, reject, refuse or ignore requests as criminals will be more pushy and to report and suspicious activity that you may have come across. There are also checklists to help the public identify if what they are experiencing is fraud or genuine activity from the HMRC.
HMRC are set to seek clarification from Boris Johnson as to where the £58,000 that was spent on his Downing Street flat came from and whether this money should have been declared. News on this inquiry came after former chief advisor, Dominic Cummings, claimed Johnson had “possibly illegal” plans for donors to pay for the refurbishment.
A spokesperson from HMRC said that the Prime Minister would be “treated like any other taxpayer” as it seeks “clarification” on whether Mr. Johnson derived any benefit in kind from any loans or donations for the refurbishment of No. 11 Downing Street.
It has been made clear that no formal investigation has been launched into the Prime Minister’s financial affairs, he added: “Things like this are declared by UK taxpayers all the time and it is the role of HMRC to clarify with people if these are subject to tax. The Prime Minister is no different to anyone else in this regard.”
Downing Street continues to insist that Mr. Johnson has paid for the upgrades himself, there is speculation, however, as to whether he paid them directly or repaid a loan or party donation that was used to cover them initially.
International Trade Secretary Liz Truss argues the Prime Minister had covered the costs “from his own pocket”, but failed to answer continuous questions from the BBC’s Andrew Marr on whether a Tory party donor initially provided the money to him.
The Daily Mail published emails sent to Tory party chairman Ben Elliot. In one, sent in October, Tory donor Lord Brownlow said he had given £58,000 to cover payments “the party has already made”.
Fiona Fernie, a tax disputes and resolution partner at tax and advisory firm Blick Rothenberg, said: “HMRC will always look for clarification if there is a chance that money wouldn’t have been received by someone unless it was because of the position they were in. HMRC would not want to be seen not to seek clarification from the Prime Minister when it would from anyone else.”
A No. 10 spokesman commented: “More information on works on the Downing Street estate, including the residences, will be covered in the Cabinet Office’s 2021 annual report and audited accounts. Any costs of wider refurbishment in this year have been met by the Prime Minister personally.
“The Government and ministers have acted in accordance with the appropriate codes of conduct.”
A spokeswoman for Boris Johnson said: “We have transparently laid out the historic expenditure on the annual allowance.
“The Downing Street complex is a working building, as well as containing two Ministerial residences. As has been the case under successive administrations, refurbishments and maintenance are made periodically. More information on works on the Downing Street estate, including the residences, will be covered in the Cabinet Office’s 2021 annual report and audited accounts. Any costs of wider refurbishment in this year have been met by the Prime Minister personally.
“At all times, the Government and Ministers have acted in accordance with the appropriate codes of conduct. Cabinet Office officials have been engaged and informed throughout and official advice has been followed.
“All reportable donations are transparently declared and published – either by the Electoral Commission or the House of Commons registrar – in line with the requirements set out in electoral law, and gifts and benefits received in a ministerial capacity are declared in transparency returns.”
HMRC has uncovered a vast number of Britons with secret Swiss bank accounts and investments hidden in the Caribbean. With new international tax data and firmer penalty powers, HMRC has sent out tens of thousands of warning letters to UK residents making money abroad.
From their findings, 1,000 tax bills have been sent out this year, some large amounts of more than £100,000 are demanded to be paid in less than a month's notice. Tax accountants say that individuals with rental properties abroad or investments in foreign accounts are often oblivious that they owe money to the HMRC.
The crackdown on offshore tax avoidance has increased since the coronavirus to help fund the recovery of the financial loss. Greater powers have been given to HMRC including demanding unpaid tax going back twelve years (twice the previous amount.) They also have the ability to punish late payments and unpaid bills.
Tens of thousands of “nudge letters” were sent out to UK residents, with HMRC believing that one in ten UK taxpayers had an offshore financial interest. This could be a holiday home that is rented out, inheritance earning interest in a foreign account, or investments held abroad.
Dawn Register, head of tax dispute resolution at accountancy advice firm BDO, says lots of people were 'totally oblivious' that their overseas bank information was being shared.
She said: 'For some people it is an alarming letter to receive, but it is particularly alarming if it comes out of the blue. The criticism of HMRC is that they do not do more analysis before they send out the letters.'
Recent laws introduced in 2018 mean the taxman can charge a 200% penalty on tax owed on overseas income and gains.
For example, if you owed £10,000 in tax, you'd be fined £20,000 on top of that amount. Ms. Register says: 'That adds to the alarm and panic that these letters can cause. It is a really nasty sting in the tail. A lot of these arrears go back many years so bills can be significant.'
If fraudulent activity is involved, the taxman can demand tax going back over a period of 20 years. Ms. Register adds: 'The changes in law show HMRC really want to punish people who do not come forward and pay UK tax on offshore income and gains.'
In the Budget, the Government believed new steps to tackle tax avoidance and evasion would raise £2.2 billion over five years. However, Rachel de Souza, partner at tax firm RSM, says most of her clients who received a nudge letter did not owe any tax.
She says: 'Broadly what we found is in most cases we know clients are fully compliant and have declared everything. A simple call will sort out where HMRC thinks there is some mischief and in most cases there is no mischief and that's the end of it. There is a perception that HMRC is going to get tougher, the reality for me is I haven't seen them get any tougher.
'But what we have seen is HMRC get increasingly more successful at finding people who haven't declared the correct amount of tax. Their systems are far more sophisticated than people can potentially imagine. There is an enormous amount of data coming into HMRC.'
HMRC declares it does not send out letters on speculation alone. A spokesman for the HMRC said: 'We now have unprecedented amounts of information about offshore bank accounts and overseas income.
'More than 100 countries regularly and automatically share financial information so we can check people are paying the right amount of tax. This significant increase in global transparency is playing a major role in helping us tackle tax evasion and avoidance and we'll continue working to bring more transparency to ensure there's a level playing field.
'We'd encourage anyone with offshore income to do the right thing, check their tax returns are correct and let us know if they need to correct any mistakes.'
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