28 June 2022
As illustrated in a recent Weekly Tax Brief article, HMRC has become a target for fraudsters making illegitimate claims for tax relief. In particular, it appears both the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS) have been subject to widespread abuse.
The SEIS and EIS initiatives are government incentives that encourage investment into start-up and scale-up companies. In return for putting their funds at risk and providing investment capital to early-stage companies, individual investors can receive substantial income tax and capital gains tax reliefs.
A recent freedom of information request submitted by RSM UK has revealed that HMRC has opened 370 enquiries in the four tax years up to 5 April 2021 where EIS or SEIS has been claimed but the investment concerned was never actually made.
The statistics provided by HMRC show that, as a result of these enquiries, it recovered tax of £1,482,462 in the 2017/18 tax year; £1,022,460 in the 2018/19 tax year; £635,030 in the 2019/20 tax year and £798,107 in the 2020/21 tax year. The number of enquiries in these years was 112, 81, 62 and 115 respectively. The total tax recovered by HMRC in these four tax years was therefore £3,938,059.
HMRC's approach to granting SEIS and EIS tax reliefs appears to be ‘pay now, ask questions later’. Fraudsters and unscrupulous accountants and tax advisers have taken advantage of this, obtaining fees based on tax refunds and credits claimed on behalf of clients that should never have been claimed in the first place. As a result, HMRC has sought to recover the tax relief falsely claimed from unsuspecting victims of fraud, rather than the fraudsters themselves. These figures demonstrate the pressing need for more effective policing of the accountancy industry to protect taxpayers from rogue accountants and tax advisers.
It should be noted that the figures provided by HMRC only highlight what has been recovered. Unfortunately, it is quite possible that there are many more instances where tax relief has been paid out illegitimately and lost to the Exchequer. It is telling that the number of enquiries and amount of tax recovered dropped significantly in 2020 and this points to potential problems in HMRC’s ability to address this issue during the pandemic. Issues with HMRC's performance over the last few years are well known , but hopefully steps can still be taken to recover any lost tax revenue.
Ultimately, it is a sorry state of affairs for the public purse and for any taxpayers suffering the stress of enquiries when they have been duped into making false claims for tax relief. Serious questions should be asked as to whether HMRC's approach is an appropriate one or whether more due diligence should be undertaken to ensure only those who are genuinely entitled to the tax relief receive such support.