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Taxpayer in the dark about fraudulent EIS claims | accountingweb
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Loophole leaves agent authorisation open to abuse

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An offshore worker was in the dark about fraudulent Enterprise Investment Scheme claims his advisers had submitted on his behalf.

24th Mar 2023
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Several cases have recently arisen of agents making bad Enterprise Investment Scheme (EIS) claims for their clients. Most recently I wrote about Doctor Rizvi, who was held liable for his agent’s reckless behaviour.

Close on his heels comes the case of Robert Robson (TC08746), where the first tier tribunal (FTT) heard of an even more alarming set of events.

Robson’s view

Robson worked offshore in PAYE employment. A colleague suggested to him he might be entitled to a tax rebate, and referred him to Capital Allowances Consultants Ltd (CACL) who might be able to assist him.

In September 2016, CACL registered with HMRC using the online agent authorisation service. HMRC sent a code to Robson, which he passed on to CACL. The letter accompanying the code said: “[CACL] has told us that you want to authorise them to act as your agent on your behalf in connection with your tax affairs… Once this authority is activated it will allow us to exchange information about your tax affairs with Capital Allowances Consultants Ltd.”

The various emails between Robson and CACL that followed (in all but one instance headed “tax rebate”) resulted in the agent notifying Robson that he would receive a payment of £5,504, which in due course he did. As far as Robson was concerned, that was all that was going on.

HMRC’s view

However, the view from HMRC’s office looked somewhat different. Self assessment tax returns for 2015/16 and 2016/17 were submitted by CACL on 3 January and 6 April 2017. These returns included claims for EIS investments generating tax repayments of £8,250 and £16,513 respectively, payable to two nominee companies – Cryoblast and ECO Cooling Systems.

The two repayments were duly made in January and April of 2017, and there the matter rested for a while. No enquiries were raised into the returns, and the window for any such enquiry had closed when, in March 2019 Officer Barclay of HMRC wrote to Robson asking for sight of forms EIS3.

When Robson pointed out that he did not possess forms EIS3 because he had not made any such investments, Barclay raised discovery assessments.

Complex issue

At the FTT Judge Jennifer Dean experienced no difficulty in deciding that the assessments were made out for the correct amount of tax: the amount was simply the quantum of the investment for which EIS relief had been claimed without entitlement.

Whether they were validly made was, however, a more complex issue. Given that a return had been submitted, a discovery assessment could only be made if one of two conditions had been met:

  • at the time the enquiry window closed, the officer “could not have been reasonably expected on the information before him to be aware of the insufficiency”, or
  • the insufficiency was brought about carelessly or deliberately by the taxpayer or a person acting on his behalf.

HMRC asserted that both these criteria had been met.

Reasonable expectation

On the first criterion, Robson had pointed out that HMRC “had received an allegation of fraudulent conduct by CACL and were investigating the company’s client list” some time before Barclay first contacted him. 

However, the judge noted that this alone was insufficient to debar HMRC from assessing. Following the Supreme Court’s judgment in the case of Tooth, it is not possible to assert some form of collective knowledge to HMRC. Even if someone somewhere within the department had strong suspicions about CACL’s activities, what matters for the purposes of TMA s29 is Officer Barclay’s level of awareness, and the first thing he knew about the case was when he learned that no EIS3 existed. His “discovery” at that point was a valid one.

Belief of carelessness

On the second criterion, the judge concluded that HMRC was in error. Barclay had never given consideration to deliberate behaviour, but had based his view on a belief that Robson (or someone acting on his behalf) had been careless.

The judge was not convinced that Robson had been careless. 

“Robson had relied on what he believed to be regulated accountancy advice in pursuing a rebate and, in doing so, he accepted CACL’s explanation that the reference to investment was ‘legal jargon’ which should not concern him… Mr Robson is not a tax expert; I consider that his actions were those of a reasonable taxpayer seeking professional advice in circumstances where Mr Robson had no previous experience of the tax system.”

She was also unable to accept that CACL had been careless. 

“In circumstances where, on the material before me, it appears that a fraud has been perpetrated I do not accept that the actions of CACL can be described as merely ‘careless’… In my view ‘carelessness’ connotes a different manner of behaviour to and is distinct from fraudulent conduct.”

Was it on his behalf?

The judge did “not consider that that is an end to the matter. It seems to me that HMRC failed to consider the requirements of s29(1) more widely in reaching its decision.”

The case law relied on by HMRC (Clixby vs Poutney) is clear that, in normal circumstances, a principal is “bound by the fraudulent conduct of an agent even if the principal was unaware of the fraud”. In that case, however, the taxpayer had signed returns without checking or examining them, “although there was no positive decision by the taxpayer not to do his duty, there was conscious carelessness as to whether or not he was doing his duty.”

On the evidence before her, Judge Dean could distinguish Robson’s case from Clixby. She noted that HMRC’s letter to Robson enclosing the agent code had said “it will allow us to exchange information about your tax affairs with” CACL. It had never offered him any reason to believe that CACL could submit tax returns in Robson’s name without ever showing him what they were doing. Robson’s belief was that all he had authorised CACL to do was to claim a PAYE tax rebate for him.

The declaration that must be made when an agent submits an electronic tax return states: “I confirm that my client has received and approved a copy of this return containing the correct return reference number and given me authority to submit their return.” On the available evidence, the judge concluded that this declaration – which must have been made by CACL, else HMRC would have rejected the returns – was false. Robson was ignorant of the existence and contents of the returns allegedly made on his behalf.

Since Robson had not authorised CACL either to submit returns on his behalf or to claim EIS on his behalf: “I concluded that CLAC was not the authorised agent of Mr Robson. That being so, the return cannot be deemed to have been submitted on behalf of Mr Robson. As s29 TMA requires the filing of a return the statutory requirements are not satisfied.”

Robson’s appeal was upheld.

In the dark

The electronic return filing declaration was not, it appears, robust enough to prevent the rare occasions when agents keep their clients completely in the dark. As the judge suggested, “It appears to be an unfortunate loophole in HMRC’s system that this process was open to abuse.”

Thankfully, from 15 March 2023 it is no longer possible for a taxpayer to assign income tax repayments to an agent, which should remove the incentive for this type of fraud.

Replies (4)

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avatar
By Hugo Fair
24th Mar 2023 18:22

"Thankfully, from 15 March 2023 it is no longer possible for a taxpayer to assign income tax repayments to an agent, which should remove the incentive for this type of fraud".
Hmmm ... reduced but not removed, judging from the thread posted yesterday (but now deleted)!

"A Rare Exciting Opportunity to be part of Tax Tech
Looking for a tax advisor to build an app to automate income tax administration process

We are a startup with current valuation of £300M, specialising in tax filing automation.

While we understand that there are some complexities in the UK tax system, we believe there are some exciting opportunities to use latest technologies to automate certain processes.

We are looking for a partner with deep expertise in income tax who shares the same passion to bring innovation into this space.

Ideally we are looking for London-based tax accountants with professional certification and experiences in PAYE code correction, overpaid tax (or underpaid tax credit) repayment and self-assessment."

On further exploration, OP confirmed that they were a Korean entity looking to build a 'more efficient' set of software solely focussed on automating bulk claims (across the board) from HMRC!

Thanks (3)
avatar
By Justin Bryant
27th Mar 2023 10:13

The real loophole here is HMRC's pay now, check later process, as has been commented on/criticized by at least one judge I recall.

Thanks (4)
Replying to Justin Bryant:
avatar
By Justin Bryant
27th Mar 2023 11:18

I see these people agree with me:

"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."

https://www.taxwatchuk.org/eis_fraud_victim/

Thanks (3)
avatar
By Ian McTernan CTA
27th Mar 2023 11:51

If only HMRC systems were fit for purpose, this sort of claim with EIS would not be possible as HMRC approve the EIS and then issue a unique number for each investor's investment.

You then enter those numbers on the Tax Return- but they aren't cross referenced!!

Simple solution would be to have some joined up thinking...but instead I suspect the next crackdown will be on EIS restricting relief etc, as that seems to be the HMRC response these days (see R&D).

Thanks (4)