Contentious tax: quarterly review - September 2020

The increased flow of information and data to HMRC under the common reporting standard (CRS) has prompted a flurry of so-called ‘nudge’ letters to be issued by HMRC to taxpayers whose offshore affairs it considers may not be in order. Additionally, HMRC has stated that the coronavirus job retention scheme (CJRS) may be a ‘magnet for fraudsters’ and is ramping up its efforts to clamp down on misuse. The High Court case of HMRC v IGE USA Investments Ltd & others may indicate that HMRC is adopting a more aggressive position with corporates where perceived avoidance is in play.

(This article first appeared on Tax Journal)

CRS and HMRC nudge letters

Since early 2017, HMRC has issued nudge letters to taxpayers to encourage taxpayers to act in a certain way. This type of HMRC activity is driven not by statute but by behavioural science. A batch of nudge letters were recently issued by HMRC, to a large number of individuals who may have overseas income and/or gains and whose tax affairs it suspects may not be fully in order and up to date. Revenue authorities globally are making more use of information obtained under the CRS and other exchange of information arrangements with tax authorities of other jurisdictions. HMRC has had information exchange agreements in place with certain of the UK’s crown dependencies since 2014, and has been able to request material under other information exchange provisions (notably the Mutual Assistance Directive and the provisions of various double taxation agreements) since considerably before then. The automatic exchange of information that has been enabled by the CRS is an important part of international tax reform – both under the BEPS project and more generally – in that information can be ‘pushed’ to tax authorities rather than them having to ‘pull’ it from overseas tax authorities.

HMRC’s latest nudge letters state that HMRC has compared the recipient’s UK tax records with the information that it has received through information exchange provisions. The letters acknowledge that there may be a reasonable explanation for the apparent discrepancy, but they invite the recipients to review their affairs and recommend that they should take professional advice if they are uncertain whether or not they have declared all overseas income and/or gains which may be taxable in the UK. The letters impose a 30-day deadline for a response, requiring recipients to act quickly and a ‘certificate of tax’ form is enclosed with the letter by way of a suggested response. Taxpayers providing tax certificates are asked to confirm that the information provided is ‘correct and complete to the best of [the maker of the declaration’s] knowledge and belief’, and that they understand that dishonestly making a false statement in order to evade paying tax is a criminal offence that can result in investigation and/or prosecution. Note that there is no statutory requirement for an individual to complete and submit this certificate. Taxpayersshould therefore consider very carefully whether they should provide a tax certificate in the form provided or respond in another form. The certificate does not limit itself to any particular year, or to any particular taxes. As there is no de minimis threshold to excuse minor mistakes, a taxpayer who provides a tax certificate could, at the logical extreme, render him or herself liable to prosecution in respect of £1 of interest earned on a small sum sitting in a forgotten bank account many years earlier. Further, providing an inaccurate certificate is likely to lead to the imposition of penalties at the more severe end of the spectrum. HMRC may argue that the conduct was ‘deliberate and concealed’ which, where there is an offshore aspect, can lead to a 200% penalty.

Given that failure to disclose offshore income/gains, or making an inaccurate return in respect of them, is a specific criminal offence (see TMA 1970 ss 106B–106H), attempting to remedy any deficiency by way of completing the certificate provided by HMRC, may not be the most appropriate route. Other more suitable alternatives are available and should be considered.

It is not surprising that HMRC is pursuing undisclosed foreign income, capitalising on both the information it receives from foreign tax authorities under the CRS and the public’s general dislike of offshore tax planning. By using carefully worded nudge letters, HMRC brings pressure to bear on taxpayers, some of whom may need to make an appropriate disclosure to HMRC. However, given the potential consequences, including criminal proceedings, taxpayers who receive such a letter from HMRC should seek expert professional assistance before responding.

The CJRS and its potential misuse

The CJRS was announced on 20 March 2020, with the aim of protecting UK jobs during the global coronavirus pandemic. The CJRS has undoubtably assisted in safeguarding many jobs in recent months. HMRC has confirmed that, as of 2 August 2020, the total number of jobs furloughed was 9.8m, with 1.2m employers furloughing staff members and the total value of claims being £33.8bn. However, the CJRS was by necessity introduced quickly, with little guidance and the guidance that was issued was complex. This has made it, in the words of HMRC’s chief executive Jim Harra, ‘a magnet for fraudsters’.

HMRC has acknowledged the inevitability of some employers inadvertently falling foul of the rules and that, as the CJRS is dependent on its users’ honesty, there is ample opportunity for abuse. Examples of how the CJRS might be abused include:

• placing employees on furlough and then requesting that they continue to work as normal;
• pressurising or encouraging employees to work on a ‘voluntary’ basis;
• claiming on behalf of an employee without their knowledge and recovering 80% of the employee’s salary, while the employee continues to work as normal;
• claiming on behalf of a ‘ghost’ employee – someone who has been dismissed before the CJRS’s start date of 19 March 2020, or a non-existent employee who commenced work following this date;
• employers misrepresenting the working hours of staff, so that they can maximise payments recoverable from the CJRS.

The full extent of furlough related fraud is, by definition, difficult to determine with any degree of accuracy. However, HMRC reported, on 22 July 2020, that it is considering 6,749 cases of potential misuse of the CJRS, including cases where employers have asked employees to work while on furlough or have withheld funds. HMRC have revealed that up to £3.5bn in CJRS payments may have been claimed fraudulently, or as a result of error, and confirmed that enquiries have been opened into 27,000 ‘high risk’ cases. During his annual report to the Public Accounts Committee on 7 September 2020, HMRC’s chief executive, Jim Harra, disclosed that HMRC are working on the assumption that 5-10% of CJRS claims were paid out incorrectly. This includes all claims from employers who have not met the formal conditions of the scheme, ranging from instances of genuine error through to deliberate fraud. On 8 July 2020, HMRC made its first CJRS related arrest as part of its investigation into a suspected £495,000 CJRS fraud. This arrest demonstrates that HMRC is taking abuse of the CJRS seriously.

It is perhaps not surprising, therefore, that FA 2020 provides substantial enforcement powers to HMRC in relation to the CJRS. Section 106 and Sch 16 of that Act give HMRC the power to claw back CJRS payments made to businesses which were not entitled to receive such payments, or where the payments were not used to pay employment costs. Under Sch 16 paras 8 and 9, an income tax liability can now be imposed, by way of an assessment, on anyone who has received a coronavirus support payment to which they were not entitled. The charge is to income tax even if the recipient is a company chargeable to corporation tax. The amount of income tax is equal to the CJRS grant the person was not entitled to and which has not been repaid, i.e. it is a 100% tax charge. If an assessment is issued under para 8 and is disputed, it can be appealed in the usual way.

Significantly, where a business has (or is likely to) become insolvent, Sch 16 para 15 empowers HMRC to impose stringent individual accountability on company officers through joint and several liability with each other and the company for the company’s income tax liability where there has been a deliberate act to claim, or retain, CJRS grants to which the company was not entitled.

Under Sch 16 para 13, penalties will be imposed for failure to notify the chargeability to income tax where the person knew, at the time the income tax first became chargeable, that the person was not entitled to the CJRS grant. Arguably, a person that makes a CJRS claim in good faith and then subsequently realises that it should not have been claimed, could repay the CJRS grant when they become aware that it should not have been made and avoid a penalty. The penalty can be up to 100% of the potential lost revenue if deliberate and concealed. If remedial action is taken swiftly, then this may be reduced, but the penalty will not fall below 30%. HMRC has also warned that it will consider criminal charges in cases of deliberate misuse of the CJRS. HMRC has powers of investigation where it considers there has been a failure by an employer to self-report errors and, in more serious cases involving corporates, there is a possibility that HMRC may seek to bring a prosecution for the offence of failing to prevent tax evasion, under the Criminal Finances Act 2017. Importantly, Sch 16 para 12 provides recipients of CJRS payments with the opportunity to self-report to HMRC if they have received, or retained, such payments erroneously. They must notify HMRC of a charge to income tax within:

• a 90-day window from when the CJRS grant was
  incorrectly received;
• 90 days after the day that any circumstances changed so
• that a CJRS claim is no longer valid; or
• the later of the date of royal assent, i.e. by 20 October 2020.

In line with HMRC’s stated approach, this gives those who misused the CJRS, the opportunity to self-report and avoid possible wrongdoing penalties. Failure to do so may result in a penalty of up to 100% of the amount of the CJRS wrongly claimed. Additionally, there is potential for HMRC to launch a criminal investigation or ‘name and shame’ those who are found to have overclaimed and not notified HMRC within the above stipulated time period.

The timeframe in which to self-report to HMRC in order to avoid significant penalties, or a criminal investigation, is relatively short. In view of this and the fact that HMRC is already actively investigating claims, businesses who have benefited from the CJRS should consider whether they need to review their internal records and systems in order to identify any discrepancies. Where discrepancies are detected, a more detailed and forensic examination may be required before making a disclosure to HMRC.

HMRC will wish to satisfy itself that any claim made under the CJRS was a valid claim. The more detailed the information gathered during any internal investigation, the more likely it is that the business will be able to demonstrate to HMRC that its claim was valid. Businesses that discover that they have received or retained CJRS payments to which they were not entitled should urgently consider what action to take, including, if appropriate, self-reporting to HMRC within the specified time frame.

Are corporates facing a more stringent approach from HMRC?

On 31 July 2020, a decision from the High Court in HMRC v IGE USA Investments Ltd & others [2020] EWHC 2121 (Ch), revealed HMRC’s attempt to have an historic anti-arbitrage clearance between it and General Electric rescinded, so that it could issue discovery assessments under the extended time limits for deliberate behaviour. This appears to be the first time that HMRC has accused a major company of engaging in fraudulent misrepresentation in order to gain a tax advantage.

The route pursued, i.e. declaratory relief in the High Court, is also highly unusual. As was noted in our last quarterly update (Tax Journal, 12 June 2020), the number of tax cases being litigated outside the normal statutory tribunal process, appears to be on the increase. The allegations in the IGE case revolve around the financing of certain GE companies in Australia, which the company routed via the UK. HMRC claim this was done in order to gain a tax advantage. In using UK companies as part of the transaction, GE required clearance from HMRC. This was granted on a partial basis in 2005. HMRC alleges that approval for the transaction was only given on the understanding that the funds would be used to invest in businesses operating in Australia.

However, HMRC claims that it subsequently discovered that, after leaving the UK for Australia, the AUS $5bn used in the transaction was not invested in any business, but was moved between the US, Luxembourg, the UK and Australia before eventually being sent back to the US. According to HMRC, the transactions had no commercial purpose other than to create a ‘triple dip’ tax advantage in the UK, the US and Australia. This case may indicate that HMRC is adopting a more aggressive position with corporates where perceived avoidance is in play. As well as pursuing less orthodox litigation routes, new provisions are also likely to be introduced in Finance Act 2021, which will require corporates to flag any ‘uncertain’ tax treatment in their returns. Whilst primarily aimed at issues such as transfer pricing, when read in context, a trend can be discerned. HMRC appears to be determined to challenge any corporates it considers are seeking to obtain a tax advantage. We have noted that HMRC seems to be attempting to push the boundaries in relation to certain anti-avoidance provisions, arguing that legitimate business transactions should be characterised as having an ‘unallowable’ purpose. The recent cases of Oxford Instruments UK 2013 Ltd v HMRC [2019] UKFTT 254 and Allam v HMRC [2020] UKFTT 26 (TC) evidence this trend. There will inevitably be further debate in the coming months concerning tax and how the government is going to increase revenue in order to pay for the economic cost of the coronavirus pandemic, but it is almost certain that HMRC will continue to adopt a stringent approach when dealing with corporate taxpayers.