Over the last month HMRC have swiftly changed from a tax collection machine to a money distribution centre and they have carried this out admirably.
Aside from providing funds to companies for furloughed workers, underwriting loans for small businesses and providing grants for self-employed individuals, HMRC have also deferred VAT and self assessment payment deadlines and paused compliance checks and enquiries except in certain cases.
With all the funds leaving the treasury, the question is how long before the Government decides enough money has gone out, how and when to start clawing it back and who will be penalised.
In relation to pausing tax enquiries, the exceptions referred to above include the most serious cases of tax evasion, where the taxpayer wishes to continue with the enquiry or where we are approaching time limits for HMRC to issue assessments or start investigations. HMRC is the only department in the Government that collects funds and it will fall on them to recoup the losses. Clearly, tax evaders will continue to be targeted and the Financial Times wrote in April 2020 about how HMRC are cranking up the battle against tax evasion.
Fraudulent furlough claims
There has also been some concern about whether advisers who inadvertently assist fraudsters to incorrectly make furlough claims would be subject to the provisions in the Criminal Finances Act 2017, which criminalises the offence of “cheating the public revenue” or “fraudulent evasion of a tax” (s.45, Criminal Finances Act 2017) and includes facilitation by an agent (s.44). In tax terms, this would include facilitating a fraudulent tax reclaim as well as tax evasion. It is possible therefore that the CPS could bring a claim against advisers under this act if it appears that the adviser was complicit in the fraudulent claim.
Of course, if advisers are able to show they have taken reasonable care to ensure they and their staff were not complicit, for example with relevant training, then they should have a valid defence. Remote working will add to these risks as monitoring staff becomes inherently more difficult. All firms should ensure their staff are aware of the risks of making furlough claims and what questions they should be asking their clients. They should ensure that all clients are aware of their obligations to make claims correctly and accurately.
In mid-March, just before the lockdown, HMRC sent out a number of "nudge letters" to individuals who they believe hold assets overseas and who may not have declared income or gains arising from these assets. The deadline for responding to these letters was 30 days and HMRC have stated that that "aren’t changing the deadline that we have set out... If any customer is unable to meet the 30 day deadline then they should call the number provided on the letter.. HMRC continue to be available to deal with responses, queries and disclosures throughout this period."
Clearly, while HMRC expect and understand that there will be a certain delay to obtaining information, they expect taxpayers to continue to communicate with HMRC and provide reasons for delays. Communication with HMRC is essential to managing their expectations and minimising penalties further down the line.
Since the Treasury have recently experienced a massive outpouring of funds, they will be looking to make it back and the onus will be on advisers to protect their clients from aggressive enquiries.
For those with assets overseas assets, the need to prove mens rea (deliberate intent) in respect of tax evasion was removed in s166, Finance Act 2016 and the penalty level in relation to previously undeclared income is irrespective of the behaviour that led to under-declaration. In addition, if the case is criminally investigated, the individual could be liable to a summary conviction and custodial sentence. Now it appears that for HMRC, the delays affecting everyone else due to CoVid-19 are not applicable to an individual who holds overseas assets.
This is a clear indication of HMRC’s (politically very safe) stance against those holding offshore assets. Given that taxpayers with overseas assets are not being given additional time to respond to queries (they have to write and request it), it seems that they also are likely to be targeted in the future. With the Common Reporting Standard in place, it won’t be long before HMRC identify UK residents with undeclared offshore income and gains. The advice now is as always to encourage your clients to disclose under-declaration to HMRC before HMRC comes to find them. Standard penalties for disclosures “prompted” by HMRC are automatically higher than those made “unprompted” and the time limits for HMRC to open investigations into overseas income and gains are longer (12 years) than for those arising from UK assets (four or six years) in most cases.
We have already seen certain conditions attached to the furlough scheme, for example, that for single director/shareholder companies, dividends are not to be included in the calculation of the relief. This is a clear indication that HMRC are still very much focused on penalising businesses with tax efficient structures, apparently regardless of whether the tax efficiency is brought about legitimately or not.
In addition, the scheme for self-employed individuals will only apply if they have an average of up to £50,000 profit over the last three years (or in 2018/19 alone).
On the basis of the above, it is clear that HMRC are restricting the assistance available for self-employed and small business owners. We can only infer that going forward, these are the groups that will be targeted with increased penalties or changes to legislation that increase tax rates.
IR35 changes that were due to be implemented in April 2020, passing responsibility of assessing a worker’s employment status to the end client, were postponed due to CoVid-19. The majority of self-employed workers operate as bona-fide contractors, yet the amendments to the legislation have had a huge impact on the contractor industry, with many large companies, announcing they will no longer use contractors working through personal service companies at all.
Whilst this may be the effect the Government was aiming for, making it easier to police tax payers, the impact on the individuals is significant particularly as the vast majority were not additional rate taxpayers. It is possible that we will see further changes to the legislation in relation to single director/shareholder companies and how they are taxed.
Politically, this is a good move; not only are the Government helping those who are seen to be “paying their fair share”, they are also penalising those who appear to be benefiting from the legislation the government drafted. Forgetting of course that one of the reasons entrepreneurs and small business owners have chosen to legitimately take money out of their companies’ as dividends (and not pay National Insurance) rather than salary was to offset the higher inherent risk they run in having to find work themselves, compete against larger more established companies and take full accountability for the business.
We have recently seen a raft of measures in relation to residential property, namely Capital Gains Tax and Stamp Duty Land Tax. Non-resident Landlords and others selling homes in the UK, which are not their main residence are now required to tell HMRC of the sale and pay the CGT within 30 days of disposal (sch 2, Finance Act 2019). SDLT has to be paid within 14 days of completion (s.46, Finance Act 2019). Both of these measures will ease the Treasury’s cashflow burden, as stalled real estate transactions are put back on progress. To increase the flow of funds to the treasury, it is possible that these deadlines will be implemented in respect of commercial properties as well.
Once the things have settled, we are likely to see a raft of PAYE enquiries being opened in 2021/22 to ensure that employers have claimed the furlough correctly. At the moment, employees are being encouraged to whistleblow on their employers if (e.g.) furlough hasn’t been implemented correctly. Whilst HMRC may not have the capacity to go through the reports at the moment, they may be used as a springboard to open enquiries. This should not be a problem if companies have stuck to guidelines for claiming furlough, however the enquiry could easily spiral into a cross-taxes check if the information provided in response to requests for information is incomplete, insufficient or inaccurate. If you doubt whether HMRC are permitted to request certain information, read this article.
Other areas to watch
Changes to IHT at this point would be potential political suicide as well as bringing in relatively low tax receipts. More efficient ways of increasing revenues in the short term may be to raise corporation tax and VAT. Raising income tax rates now with the economy almost at a standstill would be unlikely to win any votes. There are also some schools of thought that suggest a wealth tax may be in order.
Although there are no holds on payment of VAT reclaims for now, after the pandemic is over, there may be a backlog and delay in obtaining that repayment. There is also the potential to increase enquiries into VAT reclaims and accountants should therefore be more vigilant than ever that VAT returns are filed with all supporting documentation readily available should it be required.
For a lot of businesses, this may be an ideal time to go through the books and make sure everything is in order. With fewer staff working, a “tax audit” at this time means minimal disruption to the business and adds reassurance that taxes have been calculated and filed correctly. Advisers should consider filing tax returns with a request to reduce payments on account if their clients’ incomes have reduced significantly due to the pandemic.
HMRC will shortly start reissuing their enquiry letters as staff deployed to assist with the corona virus aid schemes are put back on normal duties. HMRC are as technologically advanced as the rest of us – the majority of inspectors can work from home and calls are being redirected so normal phone numbers are working. Inspectors are being encouraged to resume the enquiries (also though social distancing means that there are unlikely to be any business checks for the foreseeable future).
HMRC understand that where there are enquiries and investigations, most communication goes through an individual’s adviser. Therefore, unless a person can show that they have been affected by CoVid-19 and for this reason are unable to assist HMRC, the interventions will for the most part continue as normal. We are told that such issues will be dealt with on a case by case basis, usually at the discretion of the officer. Advisers should try and ensure where possible that they are picking up their post regularly to ensure they don’t miss deadlines and communicate with HMRC if there is likely to be any delay in responding. As always, if there are any doubts about how to deal with an HMRC issue, specialist advice is recommended.
Good luck and stay safe!