HMRC and COVID-19 Risk
HMRC Directorates
The major directorates in HMRC are: -
- Large Business;
- Wealthy and Mid-sized Business Compliance;
- Individuals and Small Businesses;
- Counter-Avoidance; and,
- Fraud Investigation Service (civil and criminal investigations).
These Directorates deal with everything from mistake and error through to legal interpretation.
Criminal investigations and civil enquiries into deliberate conduct or tax fraud is the exclusively administered by 4,500 staff of the Fraud Investigation Service.
HMRC and C-19 Legislative Flexability
Section 76 of the emergency Coronavirus Act 2020 provides “HMRC are to have such functions as the Treasury may direct in relation to coronavirus or coronavirus disease.”
This reflects both the scale of change, and that HMRC has taken on new temporary roles, such as administering the coronavirus job retention scheme.
HMRC’s Practical Support
HMRC has been exceptionally efficient and indeed improved cash flow liquidity for individuals through Furlough CJRS and businesses through grants but also by providing additional time to pay in negotiating civil financial tax settlements following an investigation, or generally in income tax, PAYE or VAT Returns.
But, where HMRC is refreshingly flexible with offering adjournment in standard compliance checks/enquiries, and some flexibility on delivery of FIS COP9 CDF Disclosure Reports, it will crack down on enforcement of FIS investigations when necessary because of an attack/abuse of the system. Think of furloughed employees continuing to work from home whilst the employer claims CJRS.
HMRC compliance with statutory deadlines of course continues to avoid statue time bars for instance.
If you think that HMRC has adopted a more relaxed approach to negotiated tax settlements in enquiry cases and tax investigations then think again. They are strictly prohibited from soft deal-making.
However, I have seen an element of sympathy due to COVID-19 restraints on business and therefore more flexibility on time to pay arrangements as I have briefly mentioned above.
FIS though has maintained its core investigatory work and stepping up its activities to combat those seeking to improperly profit from the new and untested COVID-19 financial support measures announced by the Chancellor. I think we can all appreciate why.
HMRC has not gone soft on Enforcement but finding new ways of working collaboratively
It is unusual for HMRC to defer the payment of taxes, slowing down on routine civil enquiries and pausing insolvency activity. That is an extraordinary consequence of an exceptional COVID-19 issue.
As most tax advisers appreciate, HMRC compliance activities are proportionate to risk. A strategic approach is put in place - a diagnostic risk Action Plan - which calls on contributions from relevant Directorates I mentioned above.
Traditionally, HMRC launches a campaign, take for instance WDF, which uses a mixture of “nudge” letters. Or perhaps increased CoP9 civil enquiries and/or publicly visible raids to change behaviours in specific sectors or specific tax regimes.
However, there does appear to have been a temporary stay in HMRC requests for information and Schedule 36 access powers. Presumably because of COVID-19 issues, but also security storage problem because if investigators are working from home, presumably in locations not geared-up to GDPR, then where do they keep sensitive data?
Also, remotely accessing taxpayer electronic files presents HMRC with a logistical online problem that has also initially paused and contributed to investigators not operating at capacity. This happened in a CoP9 I was advising on, but the HMRC remedy was swift. Similarly, files of records are being uploaded by DropBox arrangements and again I have been liaising with many inspectors and indeed HMRC Solicitor’s Office using this type of electronic facilities. Virtual Meetings using MS Team is happening, and it is actually saving on travel-related costs – we can also see the colour of each other’s eyes, but remarkably the COVID-19 issue is fostering a positive approach and HMRC should be complimented. Perhaps this will breakdown the barriers, because my current experience is very positive.
However, now is not the time to be complacent as FIS targets more severe risks to the tax regimes, where there is a deterrent message to be sent. Sometimes civil investigations do not work though and HMRC FIS targets a range of diverse frauds and sets objectives to deliver on making a big splash.
Activity involving criminal investigations under the corporate criminal offence (“CCO”) is being leveraged to presumably focus attention on regulatory professions, tax advisers and corporate enablers. These investigations are triggered where the evidence supports HMRC’s criminal prosecution policy, so it is unlikely to take a relaxed approach just because of COVID-19.
HMRC is expecting businesses and their advisers (“regulators”) to look at due diligence and risk prevention in light of the new risks emerging from COVID-19 – such as checking that home-workers are not continuing to work, or fraudulent claims under CJRS and business grants. Specifically, there should be no Nelson’s Eye to managers encouraging furloughed staff to continue working (or deliberate arrangements to cover-up working). This is potentially an abuse in line with HMRC’s criminal policy, an abuse of the welfare system/COVID Act and s 76 facilitating HMRC to look into cheats and can bring unsuspecting corporate enablers and firms within CCO. Basically, and quite rightly so using a strict liability offence to ensure the COVID-19 relief measures benefit only those businesses and firms who use them correctly.
Tribunals, Off Payroll Rules and CIS anti tax reduction measures from April 2021
IR35 reared its head yet again (please refer to my blog IR35 and the Inequality of outcome dated 28/04/2020) and tax litigations are being aggressively pursued through HMRC SOLS in the tribunals (first tier and upper tier). However, the basic and standard categories were temporarily postponed to the end of June 2020. Virtually proceedings using technology appears to be the way forward but home-working has put significant pressure on what was already a problem for the tribunal administration with a log-jam of 1000s of appeals cases.
The Government adjourned IR35 Off Payroll Rules in the private sector but pronounced it was to start in April 2021. Jesse Norman pronouncing this on 27 April 2020 and on the same day as the House of Lords Report was published. It appears to be a default veto exercised by the Government.
There are proposed changes to the Construction Industry Scheme (CIS) that has not seen a facelift since 2006/2007. Tax advisers may recall that old-new CIS introduced a verification test required due to issues in the supply chain. The new-new CIS proposed changes include a new power from April 2021 allowing HMRC to refuse sub-contractors CIS deductions in real time where HMRC “suspects” inaccurate amounts have been claimed/withheld. CIS abuse of gross payment status, payments by contractors by cheques cashed-in at cheque shops have always been a potential abuse of the tax crediting system. In addition, the government is considering measures (to be introduced at a later date) which would require large contractors to conduct more extensive due diligence on their supply chain, which sounds familiar to VAT tax advisers as the proposed checks are akin “KYC” checks regarding MTIC.
COVID-19 Relief Risk
Reports of new COVID-related risks are being reported everywhere - emerging as the bulk of the Covid-19 business support measures introduced in March 2020 being rushed through without an HMRC impact assessment or fraud prevention stress testing. They were designed and implemented at a rush. That is not intended to be an inflammatory statement because speed was of the essence. However, that potentially created [SWOT] situation if CJRS etc vulnerability was/is being exploited.
It is astonishing in these despairing times that fraudsters are using COVID-19 lures masquerading as worthy causes to con people and the Government. The crisis in 2008 apparently exhibited such tendencies.
HMRC will come down hard on abuse of COVID reliefs.
PAYE Real Time Information, registration on Payroll before 19/03/2020, prior authentication tests by the employer, verification tests and validity tests following CJRS payments and Grants with criteria being satisfied, may not immediately identify sophisticated abuse.
Enter HMRC’s FIS Directorate to track CJRS and self-employed grants on industrial scale abuse. Expect a splash if a regulator is found to be corrupting the system.
So, my own experience suggests that HMRC has been remarkable, working collaboratively when given the green light or offering to adjourn when necessary to do so, using technology and adapting with tax advisers like me. However, there is no room for complacency and as ever HMRC will rely on action proportionate to the abuse which has been a characteristic of their behaviour for years, but even more in these desperate COVID-19 challenging times.
I am here to help, call me on 07852700634.
Chris Leslie
Director of Tax Networks Ltd
1st May 2020
