UK Budget 2021 – resources allocated to tackle COVID-19 fraud and clamp down on tax avoidance and evasion

The UK Chancellor of the Exchequer, Rishi Sunak has included within the Government’s Budget for 2021 a specific allocation to tackle fraud in respect of the Government’s COVID-19 initiatives, as well as new investment in HM Revenue & Customs (HMRC) targeted on a tax avoidance and evasion clamp down.

We previously reported on these issues, and our expectations and predictions coming into 2021.¹ The 2020 Budget had already paved the way for increased HMRC enforcement, when Mr Sunak announced plans for significant recruitment of compliance officers and investment in tax investigation technology. In the context of the widening COVID-19 financial deficit over the past year, it became a political necessity for Mr Sunak to enhance HMRC’s investigation and enforcement capabilities.

The 2021 Budget contains two key proposals.

Tax avoidance and evasion: The Budget envisages new powers, consultation and investment for HMRC to clamp down on tax avoidance and evasion. In respect of specific tax evasion measures, the Budget outlines the following:

• The introduction of new powers concerning “electronic sales suppression” (ESS).  
  
  • The Government intends to make it an offence to possess, manufacture, distribute or promote ESS software and hardware. 
  • The Government wishes to enable HMRC to directly tackle tax evasion by businesses that utilise such technology to hide or reduce the value of their transactions and corresponding tax liabilities. The Government anticipates providing HMRC with ESS-specific information powers to identify developers and suppliers in the ESS supply chain and to access software developers’ source codes.
     
•  Consultation on the implementation of OECD rules.
  
  • The Government will consult on the implementation of OECD rules to combat offshore tax evasion by facilitating the global exchange of information on cross-border tax arrangements. 
  • The Government will consult on the implementation of OECD rules that will require digital platforms to report information about the income of their sellers to HMRC and the seller themselves. The Government anticipates this will help HMRC detect and tackle non-compliance on tax submissions. 
     
• The Government will invest £180 million over 2021 and 2022 in additional resources and new technology for HMRC. This is forecast to generate over £1.6 billion of additional tax revenues between now and 2025-2026.
  
  
• Among other things, the Government anticipates the funds will allow HMRC to recruit additional compliance staff to increase its ability to target non-compliance through illicit financial flows.

COVID-19 fraud: The Budget includes an allocation of £100 million to set up a new HMRC taskforce, the “Taxpayer Protection Taskforce” (TPT). This is one the largest planned responses by HMRC to a specific fraud risk.

• The TPT will comprise 1,265 investigators, engaged to tackle fraud arising from any of the Government’s COVID-19 initiatives. These include, in particular, the Coronavirus Job Retention Scheme and the Self-Employment Income Support Scheme. 
• The Government also proposes to significantly strengthen law enforcement in respect of Bounce Back Loans. 
• The Government plans to raise public awareness regarding HMRC’s investigatory capabilities and enforcement action, so as to raise general fraud deterrence.

Expectations for 2021

As we reported previously, HMRC is currently using its powers under the corporate criminal offences (CCOs) in Part 3 of the Criminal Finances Act 2017, to combat the facilitation of tax evasion. As of October 2020, HMRC had 13 live CCO investigations, with a further 18 live opportunities under review. These relate to 10 different business sectors, and range from small businesses to some of the UK’s largest organisations. We anticipate the 2021 Budget allocation of additional resources to HMRC will increase HMRC’s enforcement action against corporates under the CCOs. In this context, corporates should consider the efficacy of their tax and compliance policies to ensure they stay ahead of HMRC in the detection, investigation and resolution of any areas of concern.

Regarding the COVID-19 fraud measures, the TPT comes as no surprise. We previously outlined that the government schemes instituted as a reaction to the pandemic have presented rare opportunities to potential fraudsters. Even in normal times any government support scheme can be an attractive target, but the unprecedented scale of the funds made available during the crisis, together with the inevitable points of vulnerability arising from the urgency making support available, has significantly escalated the risk of fraud. There is an essential public interest and political imperative in safeguarding the legitimate use of the funds, and aggressive action by HMRC should therefore be anticipated. In this context, corporates should take steps now to ensure that any claims made under the schemes were accurate, properly documented and used appropriately. Any errors found should be proactively remediated. Failing to do so increases the risk that what may have been honest mistakes could ultimately be suspected and investigated as something more egregious.

Footnotes

1) Enhanced UK Scrutiny on Corporate Tax Evasion Procedures, International Tax Review; Coffee Break Compliance Broadcast Series, Episode Nine: Increasing Corporate Exposure to Tax Evasion Enforcement; The UK Government Furlough Scheme: Time to Reconcile