HMRC has unveiled a new consultation on electronic sales suppression (ESS), a tax evasion technique predicated on artificially reducing reported sales and the corresponding tax liability.
ESS is where businesses manipulate electronic records of sales data, either during or after the point of sale, in order to hide or reduce the value of individual transactions. This is done to reduce the recorded turnover of the business and corresponding tax liabilities, while providing what appears to be a credible and compliant audit trail.
And nestled in the consultation document, HMRC makes quite the accusation: “In recent years, it has become apparent that some software developers are developing EPoS [electronic point of sale] systems that deliberately suppress sales in order to facilitate tax evasion.”
If that’s indeed the case, it’s no wonder that the tax authority is seeking evidence on the matter. The government published a call for evidence on ESS in December to gather insight from the public, businesses and software developers to improve its understanding of the nature and scale of ESS.
Speaking to AccountingWEB, an HMRC spokesperson explained that the tax authority had uncovered examples of PoS systems that “contain hidden functionality designed to artificially reduce recorded sales”.
In one particularly dastardly example flagged by the tax authority, upon touching a blank area of a till screen a new menu opened up which asked the user to input a figure which would reduce the total of their takings by for that day, week or month.
The user entered the amount they wanted and the system itself identified and omitted sales from the company’s database and transaction logs to as close to the specified amount as possible. The system then reordered and renumbered the transaction logs within the database to create what could pass as a credible record of sales.
In another, less sophisticated example from the hospitality industry, HMRC encountered a restaurant till system which asked the user to confirm which tables they wanted to include within the daily takings report. This allowed the user to print out reports which appeared to show all the day’s takings and covers, but only represented a proportion of the total business for the day.
“These reports were then presented to HMRC as evidence of what the businesses tax liabilities should be (although these reports did not correspond with the information on the business’ underlying till system database, so this evasion activity was easier to identify than the retail example),” said the HMRC spokesperson.
Another example proffered by HMRC involved a software program called a "zapper". Often untraceable as it is accessed via a USB flash drive, the zapper accesses POS system records and allows businesses to alter records so as to make it credibly appear that fewer transactions have occurred than has actually been the case.
But the spokesperson added that while HMRC’s operational experience suggests that ESS is a growing area of tax evasion, precise estimates of the scale of evasion are difficult to calculate. Hence the call for evidence, which will try to understand the ESS phenomenon further, and how HMRC can fight back against it.
The call for evidence is open until 20 March 2019 and can be found here.
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.