With businesses starting to re-open and HMRC advising that compliance staff will be returning to their normal duties, it is expected that there will be a surge in HMRC activity over the coming months.
Businesses should therefore ensure they are ready for a potential enquiry from HMRC into both the general trading activities of the business, as well as checking any monies received from the government through any of the coronavirus support payments (CSP).
Previous to the Covid-19 outbreak and HMRC pausing its compliance activities, it had been noted that HMRC was taking an increasingly aggressive attitude to perusing additional taxes from businesses and this can only be expected to continue as they are tasked with recovering the financial hole created by the current crisis.
Whilst the majority of businesses and owners consider they have nothing to fear from an HMRC enquiry, the tactics used by HMRC can seek to create tax liabilities where there should be none. They will often use incomplete business records as a reason to question the accuracy of the accounts and seek to collect tax liabilities. The tax tribunals have shown that they will side with HMRC where a presumption by them cannot be overturned with physical evidence. However, they will also rein in an HMRC assessment where it can be demonstrated that they have acted unreasonably, so all is not lost.
Coronavirus support payments (CSP)
HMRC’s main focus initially will be on checking the validity and accuracy of claims made for CSP. HMRC has defined a CSP as the following:
- Self-Employment Income Support Scheme (SEISS)
- Coronavirus Job Retention Scheme (CJRS)
- The Small Business Grant Fund (SBGF), the Retail, Hospitality and Leisure Grant Fund (RHLGF), the Discretionary Grant Fund (DGF), or their parallel schemes in the devolved administrations
- Other payments made by public authorities to businesses in response to COVID-19
- Any other COVID-19 support scheme specified or described in regulations made by the Treasury
It should be remembered that any payments or grants received will be treated as taxable income. The rationale behind this is that the payments received are supplementing the income of a business. Therefore any business that has not made a profit due to the effects of COVID-19 restrictions will not pay any tax on the support received, after taking into account the payments received and normal calculation of other business income, expenditure and reliefs. However businesses that continued to make a profit after taking into account support payments received and all normal adjustments will pay tax on the calculated taxable profit.
Recovery of incorrect or fraudulent claims
HMRC will seek to make an assessment to tax of any CSP received where:
- There was no entitlement to it, either wholly or partly
- A CJRS payment was not used to pay the costs of a furloughed employee
The assessment will be equal to the amount received to which the business was not entitled to claim.
Where it can be demonstrated that an incorrect claim was made deliberately, or the amount received was not used for the purpose it was intended, then HMRC will seek to charge a penalty on the amount assessed, based on the penalty range for a deliberate and concealed error. The minimum penalty chargeable would therefore be 50% of the tax being assessed with a maximum penalty of 100%.
It is therefore imperative that any claims made for any of the CSPs have clear documentation and copies of correspondence to demonstrate the validity of the claim, or where an error has been made it can be shown to have been a genuine error and not a deliberate action to make a claim to which there was no entitlement.
With the changes to the CJRS scheme to bring in flexible furloughing, this will complicate the situation further and give rise to potential errors in both the understanding and calculation of the claims that can be made. As a minimum it is suggested the following information is documented:
- How the claim for CJRS has been calculated for each employee, including any third party advice received about the validity of the claim
- What the employee’s role in the business was and how the COVID-19 crisis has affected their role
- Evidence to demonstrate the employee has been furloughed and are aware of the restrictions placed on them whilst they are furloughed. This should always be in writing
- Any other evidence or circumstances to demonstrate that the furloughing procedures have been adhered to
This information would need to be kept for at least 6 years in line with the standard requirement for retention of business records.
Personal liability for company officers
HMRC is likely to be given powers to make a company officer jointly and severally liable for the Income Tax assessment raised in relation to any CJRS payment to which the company was not entitled or any CJRS payment which was never intended to be used to pay furloughed employee costs.
These powers would be only be used where it can be demonstrated that:
- The officer deliberately made a CJRS claim knowing that the company was not entitled to it
- HMRC can show there is a serious risk the company will be unable to pay the assessment
HMRC has already received in excess of 2,000 calls to their coronavirus fraud hotline from employees who have been furloughed by their employer, but do not believe that their employer has followed the rules correctly.
They will also continue to make use of their Connect database system to look for signs of a business having made a claim to which they were not entitled to and then may wish to look further into and then seek to raise an enquiry into the claim.
Our tax investigations team is always here to help you, if you have any questions or you have some concerns, please do not hesitate to contact us.