VAT expert Scott Harwood explores HMRC’s new powers and the practical steps you can take to mitigate your business’s risk of fraud.
If your business is compliant, why worry?
Over recent years, HMRC has been implementing legal measures to help them better manage the collection of VAT and taxes from the recruitment sector. HMRC’s focus is shifting to organisations that are higher up the chain from the smaller umbrellas, personal service companies and agencies.
These new legal measures often place a joint and several liability on recruitment firms. HMRC wants to ensure they have sufficient controls in place to manage the risk of tax fraud in their supply chains.
In short, if HMRC considers your controls to be ‘careless’, it has various powers to hold recruitment businesses accountable for the potential loss of tax.
It is clear that HMRC sees temporary labour supply chains as a high-risk area, and over recent years the number of investigations and challenges has increased. Particular areas of focus include:
- the potential under-reporting of VAT;
- employment taxes; and
- construction industry scheme deductions.
Such reporting errors can either be fraudulent (eg false accounting), potentially fraudulent (eg suspicion of false accounting) or avoidance (eg the use of artificial arrangements).
In general, HM Treasury’s recent consultation on combatting tax leakage has been well received by the recruitment sector, which is keen to ensure both compliance and a level playing field. A key finding is the need for employment businesses to undertake suitable and continuing due diligence.
On a practical level, we are seeing more instances of HMRC requesting data from clients that identifies their contractors and customers. HMRC then cross-checks values against data these businesses or individuals may have lodged directly to HMRC.
Use of advanced data analytics is a key component of HMRC’s future tax report framework. Making Tax Digital is the first step towards the submission of data directly to HMRC with the expectation of providing more access to information and underlying accounting data.
Historically, HMRC has had fairly limited powers in the temporary staffing market. However, the Criminal Finances Act 2017 (also known as Corporate Criminal Offence) introduced new offences, for example failure to prevent the facilitation of tax evasion by third parties or staff.
HMRC is only now realising these new powers, and it has a growing number of cases in the pipeline. To have a chance of a suitable defence, employment businesses need good tax management and suitable processes to identify where risks exist – not just in their own organisation, but across their supply chains.
Furthermore, any tax liabilities in a supply chain can transfer to the agency under the new off-payroll (IR35) rules. HMRC has also been challenging recruitment businesses withdrawing their VAT claims where the businesses knew, or should have known, they were facilitating the fraud of another party.
To demonstrate, we highlight the case of Impact Contracting. HMRC deregistered Impact Contracting and assessed its VAT liabilities at around £46m. HMRC found that the firm was facilitating tax fraud on the part of the thousands of mini umbrella companies it engaged with.
What steps can be taken?
Good controls will reduce the risk of fraud, both from within and without your organisation. They will also give HMRC greater comfort that, should fraud occur, it was isolated and unlikely to require further investigation.
These controls should be frequently updated, practised and applied.
- Step 1: Review the controls and checks you currently have in place, ensuring that they are up-to-date. Identify areas for improvement.
- Step 2: Ensure your protocols are actually being followed. This can be achieved with policies, training, testing and periodic updates to the organisation. Independent verification is preferable, as it mitigates unconscious bias.
- Step 3: Use technology. Software, IT tools and dashboards are of great help with streamlining checks, identifying fraud and managing your risk.
Case study – RSM VAT number checker
RSM has a number of unique solutions to help our clients manage the risk of tax fraud in their supply chains. Our VAT number checker service is a good example of how technology can assist with cost-effective and efficient controls:
The issue: The misuse of VAT numbers is a key aspect of many VAT frauds. It’s an area where a lack of due diligence in the supply chain can damage a business’s reputation with HMRC, and contribute to a change in its HMRC risk rating.
Validating VAT numbers in bulk on a regular basis should be a key compliance check for most businesses. It ensures the VAT treatment applied to an invoice (or self-billed invoice) can be justified based on the profile of the supplier or customer.
The solution: RSM’s VAT number checker is a simple but effective cloud-based tool a business can use to verify and cross-check the VAT numbers and registration details of all its contractors.
Running the tool once a week removes the administrative burden of manual, individual checks. In addition, all numbers – not just a sample – can be checked instantly. An audit trail is also kept on record.
- easy identification of incorrect registrations, including numbers and known addresses;
- saves your team considerable time;
- mitigates risk of HMRC assessment for incorrectly claimed VAT;
- demonstrates good behaviour to HMRC; and
- is very cost effective.
With HMRC’s new powers, it is important your business takes steps now so that it doesn’t facilitate tax evasion and fraud. This is likely to mean a risk assessment of your organisational structure and supply chain, including any risk exposure you may have through your customers and suppliers.
Under the Corporate Criminal Offence rules, your only defence is to show that reasonable steps were taken to prevent your associated persons from facilitating tax evasion in the supply chain.
These steps may not have prevented tax evasion, or even the facilitation of it, but you must still be able to demonstrate that your existing control framework at least minimised the likelihood of facilitation occurring.
If you have any related issues that you would like to discuss, please contact Scott Harwood.