Funding to fight covid related tax and benefits fraud

29th December 2021 by Alex Dunnagan

UK Government has announced an extra £510m boost to DWP to fight benefits fraud following the pandemic. This is in addition to £103m already announced in the spending review

HMRC spending £155m to tackle covid related fraud

TaxWatch estimates the increase in benefits fraud due to covid was £3.39bn in 2020-21

Fraud and Error in HMRC administered Coronavirus Support Schemes is worth an additional £5.8bn

Intro & Summary

Analysis by TaxWatch has found that the DWP is spending more than twice the amount being spent by HMRC on recovering an increase in fraudulent payments arising from the pandemic. This is despite the increase in fraud seen in the benefits system in 2021 over the previous year being significantly lower than HMRC estimate of fraud and error in the Covid-relief programmes.

How much benefits fraud has there been during Covid?

During the pandemic, the amount of fraud in the benefits system more than doubled from 1.4% of total benefits payments to 3% according to the DWP. The reasons for this is the higher levels of Universal Credit payments, a benefit which has a disproportionately high level of fraud, and the fact that the department had to abandon face to face checks.^[1]Fraud and error in the benefit system for financial year ending 2021, Gov.uk, 13 May 2021, … Continue reading

If we just look at the increase in the total rate of fraud in the system, 1.6%, this equates to £3.39bn of fraud that is attributable to Covid related effects.

Overall, the total amount of fraud in the benefits system is estimated by DWP to be £6.35bn. However, this figure is before anything is recovered by DWP. DWP recovered £0.8bn in 2021. Although we don’t know how much of this was fraud recovery versus error recovery, we do know that overpayments on benefits caused by error were 0.9%, or £1.9bn, which equates to 23% of the total figure given for fraud and error (£8.4bn).

Assuming that the DWP recover fraud and error overpayments in proportion to the amount of it that exists, we get a recovery of £616m (the remaining 77% of the compliance yield). With a total fraud of £6.35bn (3% of £211.7bn), if we subtract the £616m recovered, that leaves us with the net figure of losses to benefits fraud in 2021 of £5.73bn.

Covid related tax fraud

HMRC administered three Coronavirus support schemes throughout the pandemic, the Coronavirus Job Retention Scheme (CJRS, or Furlough as its commonly known), the Self Employment Income Support Scheme (SEISS), and Eat Out to Help Out (EOHO). These schemes were subject to widespread abuse, costing the UK government an estimated £5.8bn in fraudulent and erroneous claims.

On top of this, the 2019-20 tax gap revealed that “Criminal Attacks”, “Evasion”, “Hidden Economy” and “Avoidance” equated to £15.2bn in tax losses. These four behaviours are all clearly fraudulent and made up 43% of the entire 2019-20 tax gap.^[2]The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, http://13.40.187.124/tax_fraud_gap_2021/ However, in addition to this, there are other behaviours identified by HMRC that may contain elements of fraudulent behaviour. HMRC’s TaxGap is presented net of compliance yield.

While we don’t have the figures for 2020-21 yet, there is nothing to indicate that the amount of fraud within the tax gap will have decreased.

How much are HMRC and DWP being given to combat covid related tax and benefit fraud?

An analysis of government announcements over the last year reveals that the amount of effort being put into tackling tax fraud and benefits fraud is wildly disproportionate to their relative tax losses.

In December 2021, the DWP announced that £510m of additional funding had been awarded to the department over the next three years to tackle the increase in benefits fraud seen as a result of Covid. This would allow the recruitment of 2000 new fraud investigators and was in addition to the £103m DWP secured for fraud and error at the Spending Review 2021.^[3]Autumn Budget and Spending Review 2021, Gov.uk, 27 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1029973/Budget_AB2021_Print.pdf ^[4]Counter-fraud Funding, Hansard, 13 December 2021, https://hansard.parliament.uk/commons/2021-12-13/debates/21121315000012/Counter-FraudFunding This takes the total amount allocated to the DWP to deal with the problem to £613m over a three year period, starting in April 2022, a little over £200m a year.

The contrast with the amount being spent by HMRC is stark. In the March 2021 Budget Chancellor Rishi Sunak confirmed the creation of a £100m “Taxpayer Protection Taskforce”, to be staffed by 1,265 “HMRC operatives”, seeking to recoup money wrongly claimed from pandemic support schemes.

With HMRC announcing on multiple occasions that it was not intending on hiring new staff to deal with fraud and error in Coronavirus support schemes,^[5]It was reported in City Wire in March of 2020 that HMRC wasn’t planning on increasing its recruitment despite the new workload that had arisen out of the pandemic. HMRC confirmed this again in … Continue reading it is thought that these 1,265 staff are likely to have been moved from other departments.

The PCS Union reported in June 2021 that the Fraud Investigation Service of HMRC had been asked to contribute 37 staff members, which begs the question of how many of the others are fraud investigators.^[6]FIS resourcing for the Covid taxpayer protection taskforce at HMRC, PCS, 23 June 2021, https://www.pcs.org.uk/news-events/news/fis-resourcing-covid-taxpayer-protection-taskforce-hmrc

The Autumn 2021 Budget revealed that the Taxpayer Protection Taskforce would see an additional £55m of funding next year. The Taskforce is a time limited operation believed to be currently funded until 2022-23. This puts the amount spent on recovering Covid related fraud at HMRC at £77.5 a year, less than 50% of the resource allocated to the DWP.

However, none of this appears to be new money. An Office for Budget Responsibility (OBR) analysis produced alongside the Autumn Budget showed is that the amount of tax HMRC is going to collect will fall in the next two years, in part because of the reallocation of staff away from their jobs to the new taxpayer protection task force ^[7]For more information see: Budget 2021 – Four tax takeaways, TaxWatch, 02 November 2021, http://13.40.187.124/budget-2021/.

This lack of funds is leaving money on the table. Jim Harra, the head of HMRC, stated in an interview with the FT in November 2021 that the organisation will struggle to recover more than half of the losses to fraud and error to Coronavirus support schemes, and plans to recoup the money lost may not go beyond 2022-23 ^[8]HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df.

TaxWatch has already reported the stark disparity of funding to tackle all forms of tax and benefit fraud, with the result that many fewer people that engage in tax fraud end up with a criminal record than those engaging in benefits fraud. The latest figures show this pattern repeating for covid related tax and benefit fraud.

This research was featured in the Daily Mail.

References[+]

References
↑1	Fraud and error in the benefit system for financial year ending 2021, Gov.uk, 13 May 2021, https://www.gov.uk/government/statistics/fraud-and-error-in-the-benefit-system-financial-year-2020-to-2021-estimates/fraud-and-error-in-the-benefit-system-for-financial-year-ending-2021
↑2	The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, http://13.40.187.124/tax_fraud_gap_2021/
↑3	Autumn Budget and Spending Review 2021, Gov.uk, 27 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1029973/Budget_AB2021_Print.pdf
↑4	Counter-fraud Funding, Hansard, 13 December 2021, https://hansard.parliament.uk/commons/2021-12-13/debates/21121315000012/Counter-FraudFunding
↑5	It was reported in City Wire in March of 2020 that HMRC wasn’t planning on increasing its recruitment despite the new workload that had arisen out of the pandemic. HMRC confirmed this again in October 2020, stating that it does not believe it can recruit additional staff to deal with furlough fraud and error due to the 18-month time-lag between starting recruitment and getting staff fully trained.
↑6	FIS resourcing for the Covid taxpayer protection taskforce at HMRC, PCS, 23 June 2021, https://www.pcs.org.uk/news-events/news/fis-resourcing-covid-taxpayer-protection-taskforce-hmrc
↑7	For more information see: Budget 2021 – Four tax takeaways, TaxWatch, 02 November 2021, http://13.40.187.124/budget-2021/
↑8	HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df

Use of disguised remuneration avoidance schemes more than doubled after Loan Charge

7th December 2021 by George Turner

New analysis shows that the number of users of disguised remuneration schemes has increased dramatically despite government attempts to legislate against the schemes
Criminal investigations against promoters remain a rarity, with no successful prosecutions being brought against disguised remuneration promoters

On 30 November, HMRC published its latest update on the use of marketed tax avoidance schemes, including disguised remuneration schemes. ^[1]Corporate Report, Use of marketed tax avoidance schemes in the UK (2019 to 2020), HM Revenue & Customs, 30 November 2021, … Continue reading

HMRC state in their update that it “is determined to do all it can to stop unscrupulous promoters”, and that they are “targeting those who promote these schemes using all of HMRC’s powers.”

On that basis, something appears to be going seriously wrong.

According to the latest figures, the use of disguised remuneration schemes, which is one form of mass marketed scheme, remains significantly higher than before the loan charge was announced in 2016.

In 2013-2014 HMRC estimated that there were 22,000 individuals and 6,000 employers involved in mass marketed tax avoidance schemes. That peaked in 2017-18 at 41,000 individuals and 3,000 employers. In 2019-20, the latest year HMRC have figures for, the numbers are 28,000 individuals and 1,000 employers, a decline from 33,000 individuals and 2,000 employees in the previous year.

Figure 1: Number of individuals and employers using avoidance schemes each year, source: HMRC

These figures relate to all mass marketed schemes, however, HMRC report that composition of the market for these schemes has changed markedly. In 2013-14, 35% of schemes were sideways loss relief schemes, and 60% were disguised remuneration schemes. In 2019-20 HMRC state that 100% of schemes on the market are classified as disguised remuneration.

A sideways loss relief scheme involves the creation of an investment which is structured to make paper losses which are then used to offset against an individual’s income tax return. It is a type of tax avoidance that was popular with high net worth individuals.

Figure 2: Use of avoidance scheme by type, source:HMRC

If we adjust the figures for the total number of individuals using marketed schemes to take into account the changing nature of the market as published by HMRC, we calculate that in 2013-14, there were 13,200 people on disguised remuneration schemes, rising to 32,670 in 2018-19 and 28,000 in 2019-20. That is an increase of 110% between 2013-14 and 2019-20.

We put these figures to HMRC, who responded: “The tax avoidance market continues to be dominated by disguised remuneration avoidance schemes, often targeted at contractors and agency workers. Between 13/14 and 19/20 we have seen a large increase in the numbers of avoidance uses from Disguised Remuneration schemes.

During 2019 to 2020 we made over 500 interventions into promoters and enablers of tax avoidance across a range of different taxes and reporting obligations. This includes interventions into non-compliant umbrella companies operating avoidance schemes.” ^[2]Correspondence received via email from HMRC on 06 December 2021

The 2016 Budget speech ^[3]Budget 2016: George Osborne’s speech, Gov.uk, 16 March 2016 https://www.gov.uk/government/speeches/budget-2016-george-osbornes-speech when the loan charge was first revealed it was claimed that the policy would “shut down disguised remuneration schemes”. On that measure, the policy has been a failure.

In their latest data, HMRC state that there are still between 20-30 organisations behind most tax avoidance schemes marketed to the public. That is no change on when HMRC last reported the figures in the previous year.^[4]Corporate Report, Use of marketed tax avoidance schemes in the UK (2018 to 2019), HM Revenue & Customs, 30 November 2021, … Continue reading HMRC state “Since the last report was published some promoter organisations have left or significantly reduced their activity in the avoidance market. However, new promoters have entered the market.”

Furthermore, in relation to disguised remuneration schemes HMRC’s latest report discloses that there are between 60-80 non-compliant umbrella companies involved in their operation.

The use of umbrella companies to propagate disguised remuneration schemes means that data on who uses the schemes is not accurate. The largest group of users of such schemes according to HMRC are those involved in “book keeping activities”, which is what a user would be classed as if they were part of an umbrella company, regardless of what their actual trade may be. This is important because it demonstrates that HMRC are not aware of which professions are being targetted by scheme promoters. This is particularly concerning as there has been a significant amount of controversy over HMRC’s action to recover funds from employees on lower incomes.

Clearly, the surest way to close down a promoter of a tax avoidance scheme is to put them in jail. Curiously, the role of HMRC’s powers of criminal investigation appear to have been downplayed in this year’s report. In 2020, HMRC stated: “Whenever HMRC identifies a promoter or enabler of avoidance schemes we will always consider whether there is scope for a criminal prosecution. Promoting tax avoidance is not, on its own, a criminal offence but we will investigate with a view to prosecution where there is evidence that a promoter or enabler has committed fraud whilst designing or marketing avoidance schemes.”

The 2021 edition of the report has the following passage: “As well as our full range of civil sanctions, where an avoidance scheme involves fraud or other criminal offences, HMRC uses the full range of criminal powers to tackle those who promote or enable avoidance schemes.” HMRC then adds, “Since April 2016, more than 20 individuals have been convicted for offences relating to fraudulent arrangements promoted and marketed as tax avoidance schemes. The courts ordered over 100 years of custodial sentences. Most of these individuals were promoters.”

In 2020 TaxWatch sent in an FoI request asking how many criminal investigations had been opened and how many convictions HMRC had secured with regard to the promoters of disguised remuneration schemes specifically.

The answer was that over the previous five years, the department had opened nine investigations with none of them having led to a conviction at the time of the request. It is therefore important to be clear that where HMRC say they have convicted more than 20 individuals since 2016, they are not referring to promoters of disguised remuneration schemes.

We asked HMRC for an update on the numbers, and they could not provide one. We can therefore only assume that there is yet to be a single successful criminal prosecution for a promoter of a disguised remuneration scheme.

Most likely the people that have been convicted are those promoting other forms of schemes, such as sideways loss relief schemes. For example, in 2019 HMRC secured the conviction of Banyard and Blakey for a scheme involving fraudulent investments in a cure for HIV.^[5]Two jailed for £60m fraudulent HIV cure tax fraud, HM Revenue and Customs, 25 February 2019, … Continue reading Terrence Potter (who was already in jail for organising another tax fraud) and others, were convicted in 2017 for their involvement in a film scheme ^[6]IFA and ex-police officer jailed over film tax scam, FT Adviser, 05 June 2018 https://www.ftadviser.com/your-industry/2018/06/05/ifa-and-ex-police-officer-jailed-over-film-tax-scam/

The way in which HMRC combine their reporting on action related to sideways loss relief schemes, with action on disguised remuneration is becoming a bit of a theme.

In a recent Public Accounts Committee Hearing, Sara Olney, MP for Richmond Park asked, “just quickly on the loan charge what is the progress that has been made on pursuing the promoters of schemes?” ^[7]Public Accounts Committee Hearing on HMRC Annual Accounts 2020-21, Parliamentlive, 01 December 2021, https://parliamentlive.tv/event/index/d41af347-292b-4dcd-a87b-caca502ee109?in=14:03:31

The reply from Jim Harra stated, “The situation with the promotion of tax avoidance is over recent years, we feel we’ve been very successful at driving the respectable end of the tax profession out of offering tax avoidance, so the large accountancy firms, the banks, the main law firms all now have a code of practice that prevents them from doing that, but what we are left with is a core of about 20-30 hard core promoters.” He then went onto detail how the structure of the market had changed as a result of this, with most schemes now being targeted at employment income rather than high net worth individuals.

What Mr Harra is clearly referencing here is the shutting down of the sideways loss relief schemes. The latest HMRC data shows that these schemes have almost disappeared. However, this type of tax avoidance was always very different from disguised remuneration.

Sideways loss schemes were targeted at high net worth individuals (hence the involvement of major accountancy firms) and often used external financing arrangements to create fictitious losses that were used to write off a high earner’s tax bill (hence the involvement of large banks).

Disguised remuneration schemes, which is what Mrs Olney’s question was directed at, was always a different market, operated by different firms and targeting different groups of people. The figures demonstrate that there has been little progress in tackling these schemes over the last ten years, and it is not correct to suggest that the success in closing down a different from of tax avoidance should be used as a benchmark to assess the department’s performance in confronting the promoters of disguised remuneration schemes.

HMRC are clearly banking on being able to do more after they receive new powers to shut down promoters being considered as part of the current Finance Bill. However, there should be a continued focus on how the criminal law that already exists could be applied to the promoters of schemes.

HMRC’s description of what has been told to taxpayers by the promoters of schemes, which includes “You are told the schemes are safe, compliant or approved by HMRC. This is not true, HMRC does not approve avoidance schemes”, very clearly constitutes a misleading or false statement designed to prejudice the revenue, and therefore could fall under the criminal offence of cheating the public revenue.

HMRC have in the past claimed that the promoters being located offshore makes prosecution difficult. However, as we have pointed out, and as confirmed by Jim Harra in response to a question from Peter Grant at the Public Accounts Committee, there is no impediment for HMRC to arrest promoters located in the Crown Dependencies – That being the case, what are they waiting for?

References[+]

References
↑1	Corporate Report, Use of marketed tax avoidance schemes in the UK (2019 to 2020), HM Revenue & Customs, 30 November 2021, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2019-to-2020
↑2	Correspondence received via email from HMRC on 06 December 2021
↑3	Budget 2016: George Osborne’s speech, Gov.uk, 16 March 2016 https://www.gov.uk/government/speeches/budget-2016-george-osbornes-speech
↑4	Corporate Report, Use of marketed tax avoidance schemes in the UK (2018 to 2019), HM Revenue & Customs, 30 November 2021, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk
↑5	Two jailed for £60m fraudulent HIV cure tax fraud, HM Revenue and Customs, 25 February 2019, https://www.mynewsdesk.com/uk/hm-revenue-customs-hmrc/pressreleases/two-jailed-for-ps60m-fraudulent-hiv-cure-tax-fraud-2840331
↑6	IFA and ex-police officer jailed over film tax scam, FT Adviser, 05 June 2018 https://www.ftadviser.com/your-industry/2018/06/05/ifa-and-ex-police-officer-jailed-over-film-tax-scam/
↑7	Public Accounts Committee Hearing on HMRC Annual Accounts 2020-21, Parliamentlive, 01 December 2021, https://parliamentlive.tv/event/index/d41af347-292b-4dcd-a87b-caca502ee109?in=14:03:31

TaxWatch challenges HMRC over “sweetheart” deal with GE

6th December 2021 by George Turner

TaxWatch has launched the first stage of legal proceedings against HMRC over their decision to settle a billion pound tax fraud dispute with GE.

On 15th September it was reported that GE had reached a settlement with HMRC over a dispute involving a tax avoidance scheme that the company operated between 2004 and 2015.^[1]TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE, TaxWatch, 23 September 2021, http://13.40.187.124/ge_sweetheart_tax_deal/

GE had previously disclosed that were HMRC to be successful, they would be liable to pay an additional $1.1 billion in tax, before the calculation of interest and penalties. When announcing the settlement, GE disclosed that HMRC had settled for no current tax payment and GE accepting a deferred tax liability of $112 million or just 10% of potential impact that GE had disclosed.

HMRC cleared GE’s use of the scheme in 2005, on the basis that the main purpose of the arrangement was to gain a tax advantage in Australia and not the UK.

However, from 2011 HMRC received disclosures from the Australian Tax Authority which they said demonstrated GE had told the Australian Tax Office that the main purpose of the scheme was in fact to gain a tax advantage in the UK.

In 2018, HMRC is purported to have rescinded the agreement they reached with GE in 2005 on the grounds that GE obtained it by misrepresentation and concealment of material facts, and issued proceedings in the High Court seeking a declaration that the agreement had been validly rescinded.

In 2019, HMRC sought to amend their claim to state that GE made the misrepresentation and concealment fraudulently. The High Court granted the amendment but the Court of Appeal ruled that HMRC had waited too long before making the fraud allegations.

HMRC had applied for permission to appeal to the Supreme Court, and TaxWatch submitted arguments in support. The Supreme Court agreed to hear the case, but HMRC settled with GE before it could be considered by the Court. ^[2]GE Tax Fraud Case to be heard by Supreme Court, TaxWatch, 28 July 2021, http://13.40.187.124/ge-tax-fraud-case-to-be-heard-by-supreme-court/

This left in place a precedent of the Court of Appeal which limits the ability of HMRC and indeed all victims of fraud to get out of contracts which had been secured by fraudulent means.

TaxWatch maintains that given the allegations of fraud made by HMRC, the department should have initiated a criminal investigation under their criminal investigations policy. Instead, HMRC exonerated GE from any wrongdoing in its settlement without any investigation taking place under the criminal law.

TaxWatch has now sent HMRC a letter before the claim inviting the department to rescind the settlement agreement with GE by 08 December. If HMRC fails to take action, TaxWatch will consider launching a judicial review of the settlement.

Commenting, George Turner, Executive Director of TaxWatch stated:

“Given HMRC’s allegations of fraudulent misrepresentation, the public would expect criminal proceedings to be opened. Particularly given the large amounts of money at stake and the very high profile of the company and individuals involved.

“Instead, GE have been exonerated by an executive decision from HMRC, without the allegations being put before a court.

“The settlement with GE represents one of the largest settlements in favour of a multinational company that has emerged in recent years.

“It is vital that the department fully accounts for reasons behind their decision, which has seen them give up on over £1bn in taxation.”

References[+]

References
↑1	TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE, TaxWatch, 23 September 2021, http://13.40.187.124/ge_sweetheart_tax_deal/
↑2	GE Tax Fraud Case to be heard by Supreme Court, TaxWatch, 28 July 2021, http://13.40.187.124/ge-tax-fraud-case-to-be-heard-by-supreme-court/

How should HMRC treat the victims of tax fraud?

2nd December 2021 by George Turner

What should be the tax liability of people who are the victims of fraud? That is the important question raised by the case of Mike Grogan, reported in The Times last weekend.

Mr Grogan is one of a number of victims of tax advisor fraud, where scam tax advisors make fraudulent claims for tax rebates on behalf of their clients, pocketing the money themselves before disappearing, leaving the victim with a large tax liability when HMRC uncovers the fraud and seeks to reclaim the tax.

In Mr Grogan’s case, a colleague recommended an adviser who claimed to be able to access tax reliefs on out of pocket expenses connected to his work. Many financial frauds rely on referrals, that see clients paid to refer friends and colleagues. People will let their guard down when approached by a trusted contact.

After engaging in some correspondence with the person from the firm, he provided them with his identity documents to make a claim on his behalf, and he received £3,883. Having an agent submit a tax return on your behalf is nothing unusual, however, as Mr Grogan would later discover, the fraudsters had used his details to impersonate him and submit returns in his name. They changed the nominated bank account to their own account and put in claims for £11,494, pocketing the difference.

The claims were made on the basis that Mr Grogan had invested in an enterprise investment scheme company which entitled him to tax relief. When HMRC would later investigate the claim, they would discover that the company did not exist, and no investment had been made. However, by that point, they had already paid out the money.

As the claim was made in Mr Grogan’s name, they presented him with a demand for the full amount – £11.5k, an amount he had never received. Before he was contacted by HMRC, he was completely unaware of what had happened.

He provided all the details of his contacts with the scam advisor to HMRC, who accept that he is the victim of fraud. However, they have not waived the liability and continued to demand full payment. In a review of his case carried out by an HMRC officer, he was told: “I cannot see that HMRC is at fault in this matter. The fraud has been enabled by you and you are sadly the victim.”

He was also told that providing login information to the scammers for his government account “was akin to providing [the scam company] with a pin code for your bank account in terms of security.”

HMRC are putting all of the blame on what they accept is the victim of crime, whilst accepting no responsibility for the fact that they made a payment on the basis of a false claim without making any checks themselves.

This was an issue picked up by James Wild MP, Member of Parliament for North West Norfolk at a recent hearing of the Public Accounts Committee. He raised the advisor fraud case reported in The Times and asked Jim Harra, the head of HMRC, whether they carried out any checks before making payments to these kinds of scams. Mr Harra confirmed that HMRC’s policy since the mid-nineties has been “process now check later”.

In this case there were a number of red flags which HMRC could have picked up on. The tax relief was being claimed under a scheme usually accessed by high net worth individuals, yet Mr Grogan is not a high earner. The company that the scheme was being claimed for did not exist.

With EIS, it is a requirement for companies involved in the scheme to seek certification from HMRC, and for investors to obtain a compliance certificate from the company before making the claim.^[1]Venture Capital Schemes Manual, HMRC, 09 March 2016, https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm14130. It could be argued that given that in this case HMRC had not received a valid claim, they should not have been able to make the payment in the first place.

The case of Mr Grogan shows how HMRC’s policy of “process now check later” can easily be abused by fraudsters to pile liabilities onto their victims before HMRC get around to checking. For HMRC to accept no responsibility for the deficiencies in their own processes, whilst accusing the victim of being “careless” is victim blaming.

There is no dispute that Mr Grogan is a victim of crime, HMRC acknowledge that, and in pursuing Mr Grogan for the money that has been obtained fraudulently, they end up punishing the victim rather than the perpetrator of the crime.

This unfortunate situation is not inevitable. HMRC are the public body entrusted with “care and management” of the tax system and they have broad discretion over how they execute that duty. It would be perfectly within HMRC’s power to settle the matter for a much lower amount (i.e. the amount that Mr Grogan actually received). HMRC makes settlements with large taxpayers all of the time.^[2]TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE, TaxWatch, 23 September 2021, http://13.40.187.124/ge_sweetheart_tax_deal/

HMRC also have broad powers of criminal investigation which would allow them to pursue the advisor, and recover funds under proceeds of crime legislation, relieving them of the need to recover the funds from the victim. This is a much more difficult process for HMRC, but surely a course of action more in line with the principles of justice.

In this case, HMRC are refusing to disclose to Mr Grogan whether or not they have opened a criminal investigation. Again, this is a bizarre outcome of having the tax authority (which is under strict duties of confidentiality) taking on the role of the police. If someone was a victim of any other form of crime and walked into a police station to report it, it would not be acceptable for the police to reply, thanks, but we won’t tell you if we are going to do anything about it.

Overall the case raises important issues about how HMRC deals with the victims of tax crime. As the system is currently set up, the only victim is seen as the Crown, and HMRC seek to recover losses on behalf of the Crown. But as this case illustrates, taxpayers can be the victims of fraudulent tax advisors too, and it is often the taxpayer that ends up being severely impacted by HMRC action to recover the bill. Once that bill is recovered, there is little incentive for HMRC to go after the fraudster.

This is not a marginal issue involving a few shady actors. Recent years have seen an increasing number of claims brought by people involved in tax avoidance alleging negligence or even fraud against their advisors for recommending that they join a scheme and advising them that it was legal. When HMRC challenge the schemes and defeat them through the courts, that advice is demonstrated to be wrong but the tax bill lands at the feet of the taxpayer.

Many will be unsympathetic to the plight of people involved in tax avoidance schemes, but there is a broad spectrum of culpability on the part of the taxpayer. Mike Grogan’s case is an extreme example where the taxpayer had no clue what was being done in his name and the adviser stole money claimed on his behalf. In other cases, such as with some loan based disguised remuneration schemes, promoters have given wildly misleading statements about the schemes, in some cases claiming that they had been approved by HMRC.

The law is clear that where advisers behave dishonestly, they are committing tax fraud. HMRC needs to develop a better policy as to how it deals with the victims of tax fraud, beyond simply asking them to pay up and telling them it’s their fault.

References[+]

References
↑1	Venture Capital Schemes Manual, HMRC, 09 March 2016, https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm14130
↑2	TaxWatch calls for scrutiny over “sweetheart” tax deal between HMRC and GE, TaxWatch, 23 September 2021, http://13.40.187.124/ge_sweetheart_tax_deal/

The Diverted Profits Tax and Tackling Offshore Promoters of Tax Avoidance

1st December 2021 by Alex Dunnagan

The Finance Bill 2021-22 was published earlier in November, legislating for tax changes announced at the Autumn Budget. This briefing focuses on two aspects of the bill, amendments to the Diverted Profits Tax and measures relating to the promotion of tax avoidance schemes.

The Diverted Profits Tax

The Diverted Profits Tax (DPT) was introduced in 2015 to target contrived and artificial arrangements implemented by multi-national companies to divert profits out of the United Kingdom. It is a tax on tax avoidance designed to reduce the incentives on companies to implement avoidance schemes.

It should be noted that the UK government did not need a DPT to recover tax lost to artificial arrangements designed to divert profits out of the UK. Under long-standing tax principles, HMRC is able to disregard the tax effect of contrived avoidance schemes and impose taxation and penalties on companies using such schemes.^[1]See TaxWatch: Is Tax Avoidance Legal? http://13.40.187.124/is_tax_avoidance_legal/

However, the DPT was designed to act as an additional disincentive on companies using artificial avoidance schemes due to the higher rate of tax charged.

At the time it was introduced, the government estimated that the tax would bring in up to £400m a year. However, the latest forecasts from the Office for Budget Responsibility (OBR) show that the tax brought in £100m last year, but that this will be reversed this year, and that there will be no income generated from the tax over the following five years.^[2]Figures available from: https://obr.uk/download/october-2021-economic-and-fiscal-outlook-supplementary-fiscal-tables-receipts-and-other/

The Treasury response to the news that the DPT is no longer forecast to raise any revenue, as reported in the Observer, is to suggest that the tax had been successful in provoking multinationals to change their behaviour.^[3]Jon Ungoed-Thomas and Toby Helm, Osborne’s ‘Google tax’ on overseas profits now raises zero revenue, Treasury reveals, The Observer, 31 October 2021 … Continue reading

However, according to the HMRC annual accounts, published this November, HMRC are currently carrying out 100 investigations into multinational companies under the DPT, with a total tax under consideration of £3.8bn.^[4]HM Revenue and Customs, Annual Report and Accounts 2020 to 2021, p.52

The low out-turn figures presented by the OBR may therefore be a function of HMRC settling disputes with multinationals without applying DPT.

In 2019, HMRC introduced a new “profit diversion compliance facility”. This was “aimed at arrangements targeted by the DPT”, and allowed multinationals to come forward and pay the taxes they should have paid, and any penalties, without suffering DPT.^[5]HM Revenue and Customs, Guidance: Profit Diversion Compliance Facility, 10 January 2019, … Continue reading

The resolution facility is open to companies even if they are currently under investigation by HMRC in relation to DPT, as such it represents an easy route for companies to avoid the application of DPT if they believe HMRC will apply the tax following investigation. The availability of the disclosure facility to companies currently under investigation calls into question how voluntary that disclosure really is.

The technical amendments in this year’s Finance Bill appear to facilitate the settlement of disputes without DPT being charged, by extending the time period when a company can amend previous tax returns in order to get out of the DPT charge.

If OBR figures are predicated on the expectation that most, if not all of the 100 companies currently under investigation will settle under the favourable terms, this raises serious concerns about tax compliance.

As is clear from the details published by HMRC at the time the disclosure facility was made available, a number of DPT investigations relate to fraudulent conduct.

In the Profit Diversion Compliance Facility Guidance, HMRC stated that it had found that companies had adopted cross border pricing arrangements based on “an incorrect fact pattern”. In some cases this arose out of arrangements not implemented “as originally intended or declared to HMRC”, leading to a divergence between “the fact pattern” presented to HMRC and “what is happening on the ground”. This included transfer pricing arrangements based on “misleading statements”. This description clearly covers tax fraud committed by multinational companies against the Treasury.

The government therefore needs to be careful that the operation of disclosure facilities and the DPT does not lead to multinationals being allowed to escape any accountability for tax fraud by retrospectively amending their tax returns and making an after the event disclosure. The DPT should not become an amnesty for tax fraud.

Promoters of tax avoidance schemes

Clauses of the bill relating targeting the promoters of tax avoidance scheme provide HMRC with additional powers to wind up companies involved in the facilitation of tax avoidance, freeze the assets of people subject to proceedings under DOTAS legislation, and to publish information relating to tax avoidance schemes.

It is vital that HMRC is able to take swift action against the promoters of tax avoidance schemes in order to protect the public. However, it is clear that many promoters are engaged in criminal activity. As the government accepted in its recent response to its call for evidence on tackling disguised remuneration tax avoidance: “The Government recognises that the design of arrangements that are sold as avoidance schemes may in fact enable fraud”.^[6]HM Revenue and Customs, Call for evidence: tackling disguised remuneration tax avoidance summary of responses, 23 March 2021, para 2.34 … Continue reading HMRC needs to use the powers it has to enforce the law in this area.

At second reading the government was asked what it was doing to prosecute people involved in the promotion of loan schemes. The answer from the Financial Secretary to the Treasury was as follows:

“An issue I have raised directly with HMRC is how we can further prosecute and bring these people to justice. Unfortunately, I understand that many of them are located offshore, but we will be doing everything we can to ensure that those who are responsible for promoting this are brought to justice.”

It is important for HMRC to specific about what is meant by the term “offshore”. If offenses are committed by people resident, or that have escaped to, the Crown Dependencies, then there is no impediment to enforcing the criminal law of the UK.

For example, it is well known that many disguised remuneration schemes are run from the Isle of Man. The government published a series of anonymised disguised remuneration case studies which are available on gov.uk.^[7]Anonymised Disguised Remuneration Case Studies, available from: … Continue reading This detailed four case studies, of which three were identified as being schemes involving the Isle of Man. The remaining scheme did not identify any jurisdiction.

Section 13 of the Indictable Offences Act 1848 allows warrants issued in England and Wales for Indictable Offences to be executed in the Isle of Man (IoM) and the Channel Islands (i.e. Guernsey, Jersey, Alderney and Sark). Section 4 of the same act allows the enforcement of a warrant issued in Scotland to be enforced by the local IoM police.

The crime of Cheating the Revenue is an indictable offence. As such, if HMRC have reasonable grounds to suspect that the promoters of any Isle of Man or Channel Islands based schemes have committed the offence of Cheating (which constitutes any dishonest conduct that results in prejudice to the revenue), then all that is required is to issue a warrant for their arrest.

Section 5 of the Isle of Man Act 1979 enables someone in the IoM to be arrested for offences committed in the UK. While the act refers to specific “common duties” offences, such as customs, excise, and UK VAT, section 1 (2) allows for the treasury add “any duty or tax which is under the care and management of the Commissioners of Customs and Excise”.

These provisions have in the recent past allowed HMRC and other agencies to take action to arrest suspects located in the Isle of Man. In 2015, Operation Braid saw the confiscation of £500,000 from an Isle of Man businessman suspected of money laundering and a £21m VAT fraud in the UK. This action was part of a wider investigation into VAT fraud and money laundering, which saw seven arrests, 13 properties raided, and £1m in cash seized, in a joint HMRC-National Crime Agency investigation involving police forces across the UK, as well on the Isle of Man.

We have written to the Financial Secretary to the Treasury Lucy Frazer QC MP setting out the position.

Although there is no legal impediment to the enforcement of the criminal law in relation to tax on the promoters of tax avoidance schemes, there is a concern that HMRC are not adequately resourced to take on the job.

According to HMRC’s latest annual accounts, the number of criminal investigations declined steeply as a result of the pandemic, with HMRC concluding 437 criminal investigations in 2020-21, a 49% reduction on 2019-20 when the department concluded 864 investigations.

This reduction in activity is mirrored in the data from the Crown Prosecution Service (CPS) on how many offences they had charged relating to specific revenue offences related to tax fraud.

The figures TaxWatch received following an FOI to the CPS are reproduced below. They show a clear decline in prosecutions for almost all forms of tax fraud over the last five years, with the number of prosecutions being reduced substantially in 2021 as a result of the impact of the pandemic.

	2016-2017	2017-2018	2018-2019	2019-2020	2020-2021
Common Law (Cheating the Public Revenue)	144	113	127	79	19
Criminal Law Act 1977 { 1(1) } (Conspiracy to Cheat the Public Revenue)	9	13	49	27	1
Taxes Management Act 1970 { 106A }	173	127	62	69	21
Value Added Tax Act 1994 { 72(1) }	228	184	161	129	48
Value Added Tax Act 1994 { 72(3)(a) }	100	65	69	33	18
Value Added Tax Act 1994 { 72(3)(b) }	17	1	0	1	0
Value Added Tax Act 1994 { 72(8) }	1	3	2	1	0
Value Added Tax Act 1994 { 72(11) of and paragraph 4(2) of Schedule 11 }	119	196	96	137	23

As we move beyond the pandemic, HMRC will have to deal with the backlog of cases built up during the last 18 months, together with the substantial amount of furlough fraud. In order to adequately take on tax crime, HMRC will need significant extra resources to ensure that those responsible for cheating the revenue are brought to justice.

Read the full briefing in PDF format here.

References[+]

References
↑1	See TaxWatch: Is Tax Avoidance Legal? http://13.40.187.124/is_tax_avoidance_legal/
↑2	Figures available from: https://obr.uk/download/october-2021-economic-and-fiscal-outlook-supplementary-fiscal-tables-receipts-and-other/
↑3	Jon Ungoed-Thomas and Toby Helm, Osborne’s ‘Google tax’ on overseas profits now raises zero revenue, Treasury reveals, The Observer, 31 October 2021 https://www.theguardian.com/politics/2021/oct/31/osbornes-google-tax-on-overseas-profits-now-raises-zero-revenue-treasury-reveals
↑4	HM Revenue and Customs, Annual Report and Accounts 2020 to 2021, p.52
↑5	HM Revenue and Customs, Guidance: Profit Diversion Compliance Facility, 10 January 2019, https://www.gov.uk/government/publications/hmrc-profit-diversion-compliance-facility/profit-diversion-compliance-facility
↑6	HM Revenue and Customs, Call for evidence: tackling disguised remuneration tax avoidance summary of responses, 23 March 2021, para 2.34 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972080/Call_for_evidence_tackling_disguised_remuneration_tax_avoidance_-_summary_of_responses.pdf
↑7	Anonymised Disguised Remuneration Case Studies, available from: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/784201/Appendix_2___Anonymised_Disguised_Remuneration_Case_Studies.pdf

Monthly Archives: December 2021

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The Diverted Profits Tax and Tackling Offshore Promoters of Tax Avoidance

The Diverted Profits Tax

Promoters of tax avoidance schemes