Out-Law Analysis | 15 May 2020 | 11:10 am | 8 min. read
During the 2020 Budget, chancellor Rishi Sunak announced a series of measures amounting to £30 billion of additional support for public services, individuals and businesses experiencing financial difficulties because of Covid-19, including a new £5bn Covid-19 response fund, to provide any extra resources for the NHS and other public services to tackle the virus.
That was on 11 March. Just six days later, at one of the now familiar 5pm briefings, Sunak effectively acknowledged that the world had moved on and set out what was memorably described as "an unprecedented package of government-backed and guaranteed loans to support businesses, making available an initial £330bn of guarantees". That was, at that time, the equivalent to 15% of the UK's GDP. That investment in public services, individuals and businesses has effectively confined austerity, a key lever by which the deficit had been reduced to 1.8% of GDP in 2018/19, to the history books.
At the time of writing, more than 25 new funding schemes have been implemented across the UK. Diverse industry specific schemes ranging from the support of bus routes to tourism, covering measures that assist front line charities and through to SMEs and large businesses and, of course, the coronavirus job retention scheme and corresponding income support grant for the self-employed.
Nearly 60,000 staff work in HMRC, almost 30,000 in its customer compliance group whose 'business as usual' responsibilities are to ensure that the right amount of tax is paid at the right time. Officials in the various directorates deal with different customer segments — whether they be large business, wealthy and mid-sized business compliance, individuals and small businesses or counter-avoidance; they deal with everything from mistake and error through to legal interpretation. Criminal investigations and civil enquiries into deliberate conduct or fraud is the exclusive preserve of the 4,500 staff of the Fraud Investigation Service.
All HMRC directorates have brigaded staff to answer the broader department's 'call to arms'. Moving resource to where it is needed is a significant logistical challenge.
Section 76 of the emergency Coronavirus Act 2020, issued without explanatory notes, provides that "[HMRC is] 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. In normal times, the granting of such a broad power would raise widespread concern. However, HMRC is showing itself to be remarkably adaptable, making rapid policy decisions and practice changes to alleviate unnecessary burdens, provide assistance where possible, and double down on enforcement when necessary.
HMRC has attempted to improve liquidity for individuals and businesses by providing additional time to pay income tax, PAYE or VAT. It has also taken a helpful stance on interpreting residence and permanent establishment laws in light of current travel restrictions.
At the end of March, certain HMRC directorates started writing to taxpayers offering to put 'routine tax compliance checks' on hold. The letters explain that HMRC may need to contact the taxpayer if a legal deadline is reached for sending something to the taxpayer. They offer support for taxpayers who have "any health or personal circumstances that may make it difficult for you to deal with us", and they signpost an existing enhanced support webpage for further information. This stance may be partly driven by the considerable demands on the department's resources, but it is nevertheless a welcome reprieve for many taxpayers.
None of the new letters appear to relate to the work of the Fraud Investigation Service, which is likely to be maintaining its core investigatory work and stepping up its activities to combat those seeking to improperly profit from the new and untested measures announced by the chancellor.
HMRC will continue to deal with new company voluntary arrangements (CVA), administrations, individual voluntary arrangement (IVA) and trust deed proposals to allow those businesses who need financial support to get access to the appropriate insolvency regime. HMRC has stated that, during this period, it will suspend face to face visits to customers, and not petition for bankruptcy and winding up orders unless it is deemed to be essential – i.e. if fraud or other criminal activity is suspected.
Where a supervisor or trustee representing a business or individual considers that clients are unable to maintain their IVA/CVA trust deed payments, and the terms of an arrangement allow the supervisor discretion, HMRC has indicated that it will support a variation to allow a three-month break from contributions.
Agreeing to defer the payment of taxes, going slow on routine civil enquiries and pausing insolvency activity is not usual HMRC behaviour. However, one aspect of HMRC behaviour that shows no sign of changing is its belief that all taxpayers must ultimately pay the right tax at the right time – albeit, there is some temporary flexibility about what 'the right time' might be. The fact that its functions have been enlarged by statute in order to provide the lawful basis to carry out the measures it has, underscore that full observance of the law – and a firm 'no' to deal-making – will continue to be its cornerstone.
HMRC traditionally resources to risk; that is to say, it looks across the strategic picture of all tax and duty risks, and then puts in place a risk treatment plan, which calls on contributions from relevant directorates. That may mean that a taskforce or campaign – a local taskforce – is launched, which uses a blend of nudge letters, increased civil enquiries and/or publicly visible criminal raids to change behaviours in specific sectors or specific tax regimes.
The Fraud Investigation Service is generally reserved to bear down on risks that are severe, that require a deterrent message to be sent, or where civil just won't work. It prides itself on targeting a range of diverse frauds and sets a goal of delivering 'impact' rather than merely prosecution numbers.
In January, HMRC announced that it had up to 30 active criminal investigations under way into the new corporate criminal offence (CCO) and was treating that tool as a central tenet in its sustained efforts to bear down on corporate enablers – an area of strategic concern. Those investigations are on the books and the department knows that it will ultimately be accountable for delivering cases, where the evidence supports their selective prosecution policy, so it is unlikely to 'down tools' because of the coronavirus pandemic.
Indeed, the indications are that HMRC is expecting corporates to review their CCO prevention procedures in light of the new risks emerging from the virus – such as the fact that many staff are working from home so are potentially more difficult to supervise, or that fraudulent claims under the job protection scheme, specifically managers encouraging, or turning a blind eye to, furloughed staff who to continue work, might legally be classified as a 'cheat on the revenue' or fraud, and thus bring unsuspecting firms within the ambit of the CCO. Using the latest strict liability offence to ensure the relief schemes benefit only those firms who use them correctly will appeal greatly to HMRC and would likely meet with overwhelming public support.
To the extent that it has bandwidth, HMRC is still progressing with previously announced tax matters. It is, for example, considering changes to the construction industry scheme (CIS). Proposed changes include a new power from April 2021 allowing HMRC to refuse deductions by sub-contractors in real time where HMRC suspects inaccurate amounts have been claimed. 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 the whole of their supply chain, perhaps creating an alternative means of addressing less egregious breaches of the Criminal Finances Act 2017.
The bulk of the Covid-19 business support measures introduced in March had not benefited from lengthy periods of debate or consultation, nor had they been the subject of thorough impact assessments or fraud prevention stress testing. They were devised and implemented at pace from a standing start. That is to the credit of policymakers and operational staff, who are surely working harder than ever, to get fiscal support to those who need it most and to protect the economy and businesses and preserve jobs. However, that speed creates inevitable vulnerabilities. As Jim Harra, HMRC's chief executive and permanent secretary acknowledged, "time has been the enemy of perfection".
With more than 500 coronavirus-related scams and more than 3,500 phishing attempts already in operation causing £2m in losses – 18.5% of all emails to the City of London Police phishing inbox are Covid-related, fraudsters are using Covid-19 hooks, seeking to prey on those concerned about the impact of the virus, keen to contribute by donating to worthy causes, or even those who seek to legitimately invest in Covid-19 opportunities. There was a massive upswing in investment frauds after the 2008 global financial crisis, and authorities are closely monitoring trends to see whether history repeats itself.
Harra recently told the Treasury Select Committee: "Any scheme like [the furlough scheme] is a target for organised crime. Any scheme that pays out, I'm afraid attracts criminals that want to defraud it and people that are genuinely entitled to it who inflate their claims."
HMRC's aim is to strike the right balance between getting money to those who need it and preventing abuse. HMRC is relying on a number of measures to prevent fraudulent claims, including:
● the stipulation that employees have been registered on the employers payroll before 19 March 2020 and have been notified to HMRC on an RTI submission on or before that date (not on 28 February as previously stated);
● the requirement that an employer has already been authenticated by HMRC;
● a four to six day processing period to make background checks, which should flag high-risk claims;
● checks made after payout to verify a claim was real; and
● a whistleblower hotline.
Nonetheless, HMRC clearly believes that sophisticated organised crime groups will target these grants. They have already demonstrated their effectiveness at forging documents, falsifying audit trails and inventing phantom taxpayers, both corporate and human, in 'fraud proof' systems; think of MTIC frauds, charities frauds and R&D frauds. We therefore foresee that the Fraud Investigation Service will be called upon to re-imagine what 'impact' looks like in 2020, and it will be increasingly central to HMRC's superintendence of the furlough and self-employed grant schemes.
The public and politicians alike will expect a reasoned balance of interventions, to address corporate wrongdoing as well as unconscionable attacks on the publicly funded support schemes that are a critical safety net for so many. HMRC, like other enforcement and regulatory bodies, will be very mindful of the need to demonstrate robust yet proportionate and effective actions that will stand the test of public scrutiny.
This is based on an article which appeared in Tax Journal on 28 April 2020.
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