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Shaking salt on boxes of fresh fish and chipsHMRC's Fraud Investigation Service has carried out raids on 24 restaurants and takeaways  | AccountingWEB |
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HMRC takes a bite out of takeaway ESS fraud

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HMRC's Fraud Investigation Service has carried out raids on 24 restaurants and takeaways selling hot food in the latest phase of its crackdown on businesses using electronic sales suppression software to evade tax.

15th Dec 2023
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Electronic sales suppression (ESS) is a sophisticated hardware or cloud-based software tool that enables businesses to hide or 'suppress' a portion of their sales. In many cases the ESS diverts a percentage of sales receipts to a hidden bank account, sometimes an offshore account, effectively hiding those takings from the total declared to HMRC.

This can be particularly attractive to a business whose turnover is creeping towards the VAT registration threshold cliff edge. HMRC is keen to remind taxpayers that punishment for using ESS in those circumstances will include failure to notify for VAT registration penalties as well as penalties for offshore non-compliance and underpayment of corporation tax, income tax and VAT where relevant.

The tax authority's position is clear that using ESS is illegal tax evasion and businesses found in possession of the software can be fined an initial fixed penalty of up to £1,000. Further penalties of up to £75 per day can also be levied, depending on the severity of the fraud.

The penalty for making or distributing ESS to businesses is much higher, at a maximum of £50,000 for each time a tool is made, distributed or promoted.

Reductions are available for users and suppliers of ESS if they come forward voluntarily.

They're making a list, and checking it twice

After it was awarded new powers to tackle ESS in the UK in the Finance Act (2022), HMRC conducted an investigation of suppliers of ESS software and is believed to have seized their customer lists. It then encouraged businesses to confess to using ESS via a special online disclosure facility.

This soft approach was viewed suspiciously by some: "Why give these people scope to disclose they are evading tax. Throw the book at them," said one commenter.

Meanwhile, many tax advisers and experts including the Chartered Institute of Taxation (CIOT) warned against using the dedicated disclosure portal without first seeking professional advice and reminded taxpayers that more protection would be available if they used the Contractual Disclosure Facility (CDF) or Code of Practice 9 (COP9) to admit to being involved in tax fraud.

Gonna find out who's naughty or nice

HMRC upped the ante in May this year when it wrote to many of those businesses who had not yet come forward but whom it suspected of having access to or using ESS, presumably because they appeared on the seized customer lists.

The letter was unambiguous, opening with "We have information that suggests you may have misused your till system to reduce your tax bill". Strongly urging recipients to make a voluntary disclosure via the online facility, the letter warned that if this had not been done within 30 days HMRC would be in contact again.

The letter also stated: "The maximum amount of penalty we can charge for an inaccuracy or Failure to Notify is 100% of the tax due. If non-compliance involves offshore transfers outside the UK, then we can charge you higher penalties."

The tax authority said that over 50 businesses have made voluntary disclosures since the letters were sent, but many more are suspected of using ESS to defraud HMRC.

The Fraud Investigation Service is coming to town

In the latest action, between 15 November and 1 December 2023, HMRC sprang unannounced visits on 24 businesses in Edinburgh, London, St Helens and Stoke and its Fraud Investigation Service is conducting three interviews under caution as a result.

Marc Gill, HMRC’s director of Individuals and Small Business Compliance, said: “ESS tools give businesses the appearance of trading legitimately, but in reality they are stealing tax that should be helping fund our vital public services.

“We have sophisticated ways of detecting this type of fraud and anyone using, supplying, making or promoting ESS can face fines of up to £50,000 or criminal prosecution.

“We urge those involved to come forward and use our disclosure facility on gov.uk rather than wait for us to contact you – it could lead to a reduction in financial penalties.”

As well as the list of customers thought to have been compiled during investigations into suppliers of ESS, HMRC said it is also able to identify businesses it suspects of using the tools by comparing third party data such as bank accounts and online ordering platforms to amounts declared on tax returns.

Using ESS to suppress sales is a criminal offence and, although the HMRC approach has been relatively gentle thus far, could result in a criminal investigation, penalties and even a prison sentence in some severe cases.

The sooner a voluntary disclosure is made the more lenient the punishment may be, but time is running out. Anyone with information regarding the use of ESS is encouraged to contact HMRC online.

Replies (3)

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Ivor Windybottom
By Ivor Windybottom
15th Dec 2023 13:50

Surely this sort of deliberate fraud should automatically lead to criminal investigation/prosecution?

It feels far more premeditated than a casual cash diversion and with no possible justification.

Thanks (2)
Replying to Ivor Windybottom:
avatar
By FactChecker
15th Dec 2023 16:33

Of course it *should* ... but HMRC are hamstrung by a lack of (competent) resources to pro-actively chase them all - hence their keenness to encourage 'coming clean'.

It's a bit like where you capture video of thieves (including their faces) in the act of stealing a bike ... and the police are, to put it mildly, not interested in you reporting it let alone in having to tackle the crims.
[Last week I watched a neighbour's £20k+ motorbike being de-padlocked and then driven away - but 999 weren't interested (because the number plates had also been removed) and the (not very) local cop shop weren't interested in my photographic evidence (because I hadn't personally suffered a loss)!]

The reality is HMRC don't have the stomach to take on determined criminality ... just those who've 'bent the rules' a bit further than they're actually comfortable doing. So they chase the easy 'fish' (those with a guilty conscience) and ignore the bigger potential catches.

"HMRC said it is also able to identify businesses it suspects of using the tools by comparing third party data such as bank accounts and online ordering platforms to amounts declared on tax returns".
Indeed it can and this is obvious to the meanest intelligence - which is why those determined to commit this type of fraud take steps to avoid those traps (not very difficult if that's your plan from the get-go)!

Thanks (2)
Replying to Ivor Windybottom:
By Duggimon
18th Dec 2023 10:15

Ideally, yes. But HMRC are so under resourced that they have to target the highest yield strategies, which means mass mailing a list of offenders in the hope a decent number will give them more tax without further involvement.

Identifying some of the users of this software is enough for HMRC to prompt them to disclose but I expect the information they have is well below the threshold required for CPS to prosecute anything.

An active pursuit and prosecution requires multiple staff engaged in the investigation, hours of work tracking and tracing payments, the involvement of legal counsel, and all this on a per tax(non)payer basis, to be repeated again and again for each business.

Clearly the best approach for them is to go for the lowest effort partial yield approach and follow up, if possible, by pursuing and investigating those who they think will be the biggest offenders.

Thanks (1)