While the scale of evasion is difficult to quantify precisely given the concealed nature of this activity, HMRC is aware that ESS is a growing area of tax evasion that must be addressed.
Legislating against the risk of ESS demonstrates how seriously HMRC takes the threat and reflects the department’s determination to keep up with ever evolving technology to catch tax evaders.
ESS can be used by businesses to manipulate electronic sales records during or after the point of sale.
Software and hardware can be obtained that hides or reduces the value of individual transactions to shrink the recorded turnover of the business, while providing what appears to be a credible and compliant audit trail. This, of course, reduces the business’s tax bill.
Such practices have the ability to cause huge damage to the Exchequer if left to continue unchecked, hence the work to build protections into legislation.
A consultation on ESS ran between 19 December 2018 and 20 March 2019. The consultation document made interesting reading and can be found here: HMRC Electronic Sales Suppression [pdf]
A number of Electronic Point of Sale (EPOS) system manufacturers and software designers who responded to the consultation advised HMRC that some businesses openly asked for ESS functionality to be built into their till systems.
The main driver for using ESS technology appears to be to keep the business below the VAT registration threshold as well as to reduce taxable profits, which is of course tax evasion.
The types of business which are viewed as high-risk include takeaway outlets, hospitality and retail.
Schedule 14 of Finance Act 2022 gives HMRC the power to charge penalties to those involved in ESS:
At first glance, the penalty for those who are tempted to use ESS tools appear on the low side. However, it is logical to expect that HMRC will pursue such individuals who use ESS in their business using existing Civil (and perhaps even criminal) investigation powers. The penalties HMRC can charge for understatements resulting from deliberate and concealed actions are up to 100% of the potential lost revenue, so there is much to gain by leaning on ESS promoters for information to uncover the end users.
The new legislation also extends HMRC’s statutory information powers (at Schedule 36, Finance Act 2008) to persons that HMRC has reason to suspect may be liable to an ESS penalty. It also enables HMRC to issue information notices for the purposes of assessing an ESS penalty, enabling HMRC to understand the operation of the ESS tool and/or for identifying any other person whose activity might result in an ESS penalty.
The new measures will therefore enable HMRC to tackle tax evasion undertaken by businesses that use tools to hide or reduce the value of transactions and the corresponding tax liabilities and eventually deter this behaviour altogether.
Businesses which have engaged in the use of ESS historically should seriously consider making a voluntary disclosure to HMRC using the Contractual Disclosure Facility to obtain immunity from prosecution and secure the lowest penalty loadings. If taxpayers wait for HMRC to make the first move, they will find themselves in a worse position, particularly if HMRC opts to pursue a criminal investigation in order to make an example of them.
Crowe's Tax Resolutions specialists have worked with numerous taxpayers and their agents to bring historic tax issues up to date. If you choose to work with us, you can expect that we will:
Our team is approachable and provides a discreet and comprehensive service, giving you the confidence you need when dealing with a sensitive matter such as an HMRC investigation.
To discuss this further, contact Hayley Ives, Tax Resolutions.