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May 2022 Tax Investigation Round Up

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

  • HMRC confiscates assets worth £39m
  • Tax avoidance scheme promoters named
  • HMRC wins £1.7m VAT case

HMRC confiscates assets worth £39m

Account freezing orders and forfeiture orders are given when there is suspicion that funds were gained through criminal conduct. The amount seized has increased due to HMRC’s crackdown on furlough fraud.

Assets worth around £39m have been confiscated through forfeiture notices in 2021-22, a large increase from the £4.8m collected the previous year.

The law firm RPC collected data through Freedom of Information (FOI,) showing that the amount collected has increased by 712% from last year. HMRC handed out 77 forfeiture notices in the tax year 2021-22, down from 102 in 2020-21.

Similarly, the amount that HMRC froze has remained almost level with £35m worth of assets frozen in 2021-22 through 82 freezing notices. The year before was £34m however the notices were a lot higher at 229.

From introducing account freezing orders and account forfeiture orders in January 2018, £102m worth of assets have been frozen by HMRC after handing out 572 freezing orders and has confiscated over £49m through 262 forfeiture notices.

Adam Craggs, partner and head of contentious tax and financial crime, RPC stated: ‘The relative ease with which UK law enforcement bodies can seek and obtain an account freezing order or an account forfeiture order, means that they are being used more by HMRC. The threshold for obtaining an account freezing order is suspicion based and therefore low – there is no need for there to have been an associated criminal conviction or even an investigation.

‘The sharp rise in assets forfeited in the last year suggests that HMRC consider these orders to be the 'go-to' option when seeking to deprive someone suspected of wrong-doing of their ill-gotten gains.’  

Alice Kemp, senior associate, RPC, adds: ‘Given the success HMRC is now seeing with account forfeiture orders, it is likely that they will be used more and more. An account forfeiture order can be challenged by any affected person. It is possible to either resist an application or to have an order set aside or varied.’

Tax avoidance scheme promoters named

As part of HMRC’s ‘Don't Get Caught Out’ campaign, two tax avoidance schemes and their promoters have been named. This is due to newly enacted legal powers that allows them to be named for the first time. These new powers were given to HMRC in the Finance Act 2021.

The two schemes are called Absolute Outsourcing, promoted by Absolute Outsourcing Limited, incorporated in 2019, in Bury Greater Manchester and the Equity Participation Scheme promoted by Purple Pay Limited based in London set up in 2014.

The schemes both involve the individuals agreeing on an employment contract and working as a contractor. The schemes pay contractors the national minimum wage. The remainder of their salary is paid through a loan to avoid National Insurance and income tax.

The advice from HMRC is that if you have been involved in the Equity Participation Scheme from these promoters, you should withdraw from them immediately and contact HMRC to avoid a large tax bill building up.

Mary Aiston, director of counter avoidance, HMRC comments: ‘These schemes are cynically marketed as clever ways to pay less tax. The truth is they rarely work in the way the promoters claim and it’s the users that end up with big tax bills.

‘New legal powers allow us to name promoters and the schemes they peddle much faster, and this announcement is just the first step. But we need the public to be vigilant, and that’s why we’re also helping people identify, and steer clear, of these schemes through our Tax Avoidance – Don’t Get Caught Out campaign.’

By publicly releasing these details, HMRC states that it is letting taxpayers be aware as soon as possible so they can stay clear of the schemes or exit them. The tax authority is updating its records frequently, and if a scheme is not noted on the list, it does not mean that the scheme works or is promoted by HMRC and won't subsequently be investigated by HMRC or result in it's partakers undergoing a tax investigation.

The ‘Don’t Get Caught Out’ campaign aims to help taxpayers understand their pay arrangements. Detailed information is provided about umbrella companies and other tools are available to help with risk checks and payslip guidance.

HMRC wins £1.7m VAT case

The First Tier Tribunal (FTT) ruled that mistakenly paid £1.7m of VAT by the Mayor’s Office for Policing and Crime (MOPAC) could not be repaid by HMRC as the police department would ‘unjustly enrich’ the department. The appeal against HMRC’s decision to withhold the repayment was dismissed.

From 2012-17, four VAT claims were submitted by MOPAC to HMRC for overpaid VAT worth £1.7m. This was on the sale of private vehicles at an auction after they had been seized. Their final claim was submitted in March 2017.

The vehicles were secured in storage facilities until the owners paid a statutory fee by the MOPAC for the release of their vehicle. If however the fee was not paid, the vehicle would be sold at auction or destroyed with the proceeds received from the disposal the same as the fee for collection.

There were a few companies that MOPAC had contracts with for the disposal of the vehicles. The contracts included provisions where a payment was agreed to the MOPAC in return for the right to dispose of components derived and scrap produced from the vehicles.

MOPAC would then account to HMRC for the relevant overpaid amounts by way of output tax and amounts were wrongly accounted for as output tax to the scrap companies in the price of the relevant supplies. The companies would then recover this as input tax and the amounts accounted for by MOPAC as output tax.

HMRC wrote to MOPAC in April 2018, rejecting its claims for overpaid VAT on the disposal of the vehicles on the basis that ‘100% of MOPAC scrap disposal customers are VAT registered and able to recover the VAT levied on the supplies in full’ and the repayment of the ‘scrap element’ would ‘unjustly enrich MOPAC’, according to section 80 of the Value Added Tax Act (VATA) 1994.

MOPAC filed a notice of appeal against the decision to the First Tier Tribunal in May 2018.

MOPAC continued to argue that as HMRC and MOPAC are both public bodies, ‘each a proxy for the same entity’, then it has a claim to repayment as a ‘matter of principle and a right to repayment of the monies mistakenly paid’.

It also claimed that the money movements between HMRC and MOPAC are a mere ‘reallocation within the public body’ resulting in ‘neither enrichment nor net expense’ since there is no more than an internal circulation of £1.7m.

MOPAC stated that this represents both an equal expense and an enrichment to the public body without any ‘marginal or net effect or change in the position of the body public’.

Strict separation of the repayment right and the unjust enrichment defence in section 80 is critically important as the ‘assertion of the right to repayment does not engage any question or consideration of enrichment or unjust enrichment’, argued MOPAC.

Following a series of subsequent arguments, the court summarised that it was clear that the precise form of the benefit retained and reallocated was relevant and was a matter for the UK government to determine.

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