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Monthly Archives: January 2022

TaxWatch launches complaint against “Mr Red”

27th January 2022 by George Turner

TaxWatch has submitted a complaint to the Tax Disciplinary Panel about the conduct of an individual identified as “Mr Red” in the case of Murray Group Holdings vs HMRC.

TaxWatch believes that it has managed to uncover the identity of Mr Red, who continues to practice as a Chartered Tax Advisor, despite evidence of serious misconduct he engaged in when an employee of Rangers Football Club.

The case of Murray Group Holdings vs HMRC, known as “The Big Tax Case”, was one of the most important tax decisions in recent times.

The case involved a disguised remuneration tax avoidance scheme operated by Rangers Football Club for a number of years that involved players and staff being paid in the form of loans via an offshore trust. The loans were not declared as income on the tax returns of the players leading to a significant reduction in their tax liabilities.

HMRC believed that these loans were in fact remuneration and should be taxed as income.

In 2017, the Supreme Court found that the payments were earnings under PAYE legislation which meant that the club should have withheld tax due and paid it to HMRC.

Although HMRC lost their case at both the First Tier Tax Tribunal and the Upper Tier Tribunal, the findings of facts of those bodies revealed some extraordinary behaviour on the part of officials of Rangers Football Club in an effort to cover up the scheme.

In particular, the Tribunal singled out the behaviour of “a senior member of the group’s tax function”, who appeared in the anonymised judgment as “Mr Red”. The Tribunal stated that Mr Red was a Chartered Tax Advisor and former Inspector of Taxes.

During the tribunal hearing, HMRC alleged that Mr Red “misled” HMRC’s investigation into the scheme, and that “he had lied in material respects to the tribunal”.

In her dissenting judgment, Dr Heidi Poon records how Mr Red wrote to HMRC denying the existence of documents that HMRC had requested under the a statutory request for information, writing in a letter “your belief in the existence of documents demonstrating how amounts contributed to the Trust are determined is irrational and unfounded. I cannot help with your fantasies and the production of a S20 makes no difference to this”. [1]Section 20 of the Taxes and Management Act 1970 permitted tax inspectors to demand information from a taxpayer or third party in relation to a potential tax liability In fact, the documents did exist and had been uncovered by a City of London Police raid on Ibrox Stadium in connection with an unrelated investigation.

Concluding, Dr Poon stated that Mr Red’s behaviour went beyond what could be described as “a lack of candour”, she said: “It would be judicial to conclude that it had been obstructive and obscurantist, and there is evidence of active concealment of documents… to describe Mr Red as ‘somewhat defensive’ in giving his sworn testimony would be an understatement. On more than one occasion, Mr Red had attempted to mislead the Tribunal”.

She went onto say: “The overall impression created by Mr Red’s evidence, oral and written, was that he was being vague and evasive. It was clear that he was not on sure ground, because he was trying to tell a version of how the trust scheme should operate, rather than the version as it actually operated. As a result of this schism, it led to deliberation and inconsistency in Mr Red’s testimony.”

Another incident highlighted by the Tribunal was an attempt by Mr Red to influence the evidence of other witnesses. This was highlighted by the majority judgment:

​ “One aspect of his [Mr Red’s] evidence which disturbed us was his meeting with Mrs Crimson on the eve of her giving evidence. Having collected her at Edinburgh Airport it seems that there was some discussion about Trust matters and he passed to her for her consideration that evening certain extra documents including company minutes. (These were produced as late extra documents by the Taxpayers’ Counsel and Advisors for scrutiny by the Tribunal.)”

In rules in force at the time, CIOT required a member to “be honest in all his professional work” and in particular, “must not knowingly or recklessly supply information or make any statement which is false of misleading, or knowingly fail to provide relevant information. Furthermore when acting for an employer, the members were obliged to “ensure that there is appropriate disclosure of all relevant information” to tax authorities.
Despite the very clear allegations of misconduct that were placed in the public domain by the Tax Tribunal, TaxWatch has discovered that no action was subsequently taken by CIOT or the Taxation Disciplinary Board, the bodies responsible for regulating the conduct of Chartered Tax Advisors.

As a result, the individual was able to continue in practice, holding a number of senior positions after leaving Rangers Football Club. Given that the Tribunal had been clear that Mr Red was a Chartered Tax Advisor, it would have been straightforward for CIOT to contact the Tribunal, Rangers Football Club, or HMRC to seek to identify Mr Red and take appropriate disciplinary action.
The failure to take action over very clear and high profile allegations of misconduct by a Chartered Tax Advisor brings into question the robustness of the disciplinary process for the tax profession, which in turn threatens to bring the whole profession into disrepute.

For that reason, TaxWatch hopes that the Taxation Disciplinary Board will take this opportunity to take appropriate action, sending the message that the kind of behaviour outlined in Murray Group Holdings vs HMRC is not an acceptable way for regulated professionals to conduct themselves.

Photo by Bence Balla-Schottner on Unsplash

References[+]

References
↑1 Section 20 of the Taxes and Management Act 1970 permitted tax inspectors to demand information from a taxpayer or third party in relation to a potential tax liability

The gift that keeps on giving

19th January 2022 by Alex Dunnagan

Rockstar Games UK Limited (previously Rockstar North) has finally published it’s 2020 accounts, more than one year late. In fact, the publication of Rockstar’s accounts are so late that the company’s 2021 accounts are already overdue. The recently filed 2020 accounts reveal that the video game developer was entitled to £56.6m in Video Game Tax Relief (VGTR) in the 12 months to 31 March 2020. This large sum was almost half of the total VGTR paid out that year. The total amount of claims for VGTR is going up ever year, as is the amount paid out, but despite this, Rockstar appear to be capturing more and more of this relief.

The Edinburgh based games studio, which is owned by American video game giant Take-Two Interactive Software, is responsible for the development of the multi billion dollar Grand Theft Auto (GTA) series. As we wrote in Gaming The Tax System, while the UK based company develops the games, they don’t publish them, with a structure set up to ensure that the UK company turns very little profit, and therefore has little to no corporation tax liability.

VGTR – What is it?

Video Games Tax Relief was introduced by the UK government in 2014 to provide targeted support for games that were “culturally British”, with a particular focus on support for small and medium sized businesses. The idea at the time being that only smaller publishers would be interested in producing games aimed solely at the British market.

The relief works by adding notional costs to the video games producer’s accounts, reducing the taxable profit or increasing losses. Developers can deduct an extra 25% of qualifying expenditure from their taxable profit. If the game’s production company is loss-making then the developer can claim a cash credit from HMRC.

Rockstar Returns

After filing their annual return nine months late with Companies House, Rockstar’s annual accounts are finally publicly available.

Before looking at the state of Rockstar’s 2020 finances, it’s worth noting that there is a large restatement for their 2019 accounts. It was previously reported that in the year end 31 March 2019, Rockstar’s turnover was £119m and the cost of sales was £56m. These numbers have now been adjusted to show that they were actually £231m and £167m. The reason given is that there was an error in the way that staff incentive payments were accounted for, and that “in the prior period these costs have been netted off in error against intercompany rechage income”, when in fact they should have been recorded. This is quite a significant accounting error. The impact it has on VGTR claims, if any, is not known.

Turning back to the 2020 figures, Rockstar turned a pre-tax profit of £9.63m over the reporting period, but once taxation is taken into account, that number increases by £65.16m to £74.78m. The vast majority of this increase is made up by the effect of VGTR, with the remainder coming from the effects of things such as deferred taxation and changes in valuation allowance. As a result of VGTR, Rockstar was able to pay out £40m in dividends over the year.

2016

2017

2018

2019

2020

Total

Operating Profit

£3,515,268

£3,745,345

£8,242,790

£8,715,917

£9,519,819

£33,739,139

Tax on profit

£33,416,310

£13,121,157

£26,915,315

£40,035,440

£65,155,510

£178,643,732

Of which VGTR

£11,278,530

£11,918,339

£19,116,178

£37,607,824

£56,684,144

£136,605,015

Profit after tax

£36,931,578

£16,884,972

£35,216,097

£48,773,567

£74,783,921

£212,590,135

Dividends

£0

£12,500,000

£15,000,000

£0

£40,000,000

£67,500,000

The last year for which Rockstar listed taxation as a liability was 2015, when the tax was listed as a cost of -£718k. In the first five years since the introduction of the relief, Rockstar’s accounts show the company accruing £136.61m in VGTR, with total taxation for the period actually showing £178.64m in credit.

Despite only having an operating profit of £33.74m over this five year period, Rockstar was able to pay out twice that (£67.5m) in dividends to shareholders due to the subsidy the company receives from the British Government.

By the end of March 2020, 1,000 games had received “Culturally British” accreditation, [1]This number has since increased, and statistics are available for the year up until end of March 2021. However, we are only looking at Creative Industries data up until the end of March 2020 as this … Continue reading a pre-requisite for VGTR.[2]For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the … Continue reading Of these, two were published by Rockstar, with Grand Theft Auto V receiving the accreditation in 2015, and Red Dead Redemption 2 in 2019.

Studios are able to make interim claims before a game is completed, with the relief related to the production spend. The large claims from Rockstar for the 2019/2020 financial year are likely to be related at least in part to Red Dead Redemption 2, and possibly to the production costs of new games such as a future instalment of the GTA franchise, and potentially updates to GTA Online and Red Dead Online, although there may be other games in the works that we are unaware of. With Rockstar accounting for £136.6m of VGTR by March 2020, a company with fewer than 1% of the games qualifying for VGTR is set to capture over 30% of the total subsidy.

In 2018-19, 535 video games made 345 claims and received £103 million,[3]A claim may cover several games. with Rockstar accounting for some 37% of this.[4]We wrote about this at the time with our blog post Rockstar Takes The Pot, with TaxWatch analysis featuring in the Sunday Telegraph. Just as we thought the amount of VGTR hoovered up by a single multinational couldn’t increase, in 2019-20, 605 games made 350 claims and received £121m, with Rockstar accounting for some 47% of this. – despite having not released a game since October 2018.

Video Games Tax Relief was estimated to cost just £35m a year when it was introduced.[5]“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM … Continue reading However, we are now seeing just one company claim alone claiming more than that.

In October last year we said:

“Seven years from the introduction of VGTR, questions need to be asked as to whether this is achieving its initial aim, creating culturally significant games and helping British developers, or is it a scheme gone awry, with hundreds of millions in taxpayer cash subsidising successful multinational enterprises?”[6]Video Games Tax Relief – 2021 Update, TaxWatch, 14 October 2021, http://13.40.187.124/video_games_tax_relief_2021/

Rockstar’s recent accounts show how it’s more necessary than ever for the UK Government to review the effectiveness of this relief. For this US owned company, VGTR is the gift that keeps on giving.

References[+]

References
↑1 This number has since increased, and statistics are available for the year up until end of March 2021. However, we are only looking at Creative Industries data up until the end of March 2020 as this is the most recent reporting period for Rockstar. Data available at – Video Games Certified as British through the cultural test for video games, BFI, https://www.bfi.org.uk/apply-british-certification-tax-relief/cultural-test-video-games
↑2 For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 20 November 2019, http://13.40.187.124/cultural_test_tax_relief/
↑3 A claim may cover several games.
↑4 We wrote about this at the time with our blog post Rockstar Takes The Pot, with TaxWatch analysis featuring in the Sunday Telegraph.
↑5 “It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM Treasury, 19 August 2014, https://www.gov.uk/government/news/video-games-companies-to-begin-claiming-tax-relief
↑6 Video Games Tax Relief – 2021 Update, TaxWatch, 14 October 2021, http://13.40.187.124/video_games_tax_relief_2021/

HMRC reveals new estimate for Covid fraud recovery

17th January 2022 by Alex Dunnagan

Three-quarters of Covid support claimed in fraud and error won’t be collected

HMRC has revealed that they expect to recover just 25% of a total £5.8bn paid out due to fraud and error in relation to the coronavirus support schemes. [1]HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims

The latest figure has appeared in a document published on 12th January entitled “Myth Busters – HMRC’s responses to inaccurate claims” and sought to spin the figures as an achievement. Under a heading “HMRC has successfully tackled coronavirus help scheme fraud and error” HMRC explains “We recovered £500 million of overpayments in 2020 to 2021. The government then invested £100 million in a Taxpayer Protection Taskforce of 1,265 HMRC staff to combat fraud in the schemes. We expect the taskforce to recover £800 million to £1 billion between 2021 and 2023.”

This equates to a total of between £1.3bn and £1.5bn, or 22% and 26% of the amount lost to fraud and error.

The new figures appear to be a significant revision down from November last year, when Jim Harra, the head of HMRC, told the FT that the organisation will struggle to recover more than half of the losses. [2]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

The published figures suggest that HMRC will be seeing up to a 10x return on investment when tackling fraud and error in the coronavirus support schemes. It is therefore difficult to understand why the department is not being given more cash to tackle the problem and instead is leaving ¾ of the money lost to fraud and error in the hands of people that wrongfully claimed it.

Recent research from TaxWatch showed that the DWP is receiving more than 2x the funding HMRC is getting to tackle fraud and error in the benefits system arising from the pandemic – demonstrating that when an issue is deemed to be important enough, the Treasury finds the money.

This research was featured in The Times, The Daily Mail, and Public Finance, among others. This then lead to Jim Harra being questioned by the Public Accounts Committee on the figures, and to an Urgent Question in the House of Commons on fraud.

References[+]

References
↑1 HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims
↑2 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


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