Many years ago, as an inexperienced investigator working for HM Revenue & Customs, it was drilled into me that “a prevalence of cash usually equates to a fruitful tax enquiry”. Consequently, businesses operating in hospitality and retail sectors were subject to more than their fair share of investigations. Now, despite cash use becoming sparser, the spotlight still remains on these sectors – largely due to HMRC’s discovery of ESS tools being used to manipulate sales records and artificially suppress tax liabilities.
Where a business uses a device (software or hardware) to manipulate electronic sales records to support an incorrect tax return, HMRC will consider the business to be engaged in electronic sales suppression.
For example, a business using an ESS tool might make a sale for £10, with the customer paying by card. The business would receive the full £10 payment. However, when the sales records are produced, that £10 sale might have been recorded as a £5 sale or even omitted from the sales record altogether. When those sales records are used to prepare accounts and tax returns, the ESS tool will have effectively provided a false accounting record to artificially lower a trader’s tax bill.
HMRC first identified use of ESS tools during the pandemic when businesses were using devices to support their claims to the Coronavirus Job Retention Scheme. Eventually, its investigation work helped identify the suppliers of these ESS tools which, in turn, enabled HMRC to establish all businesses who had purchased such tools. In late 2022, HMRC issued a series of targeted ‘nudge’ letters to businesses it suspected of having purchased ESS tools. The nudge letters made the businesses aware of HMRC’s suspicions and encouraged them to make a voluntary disclosure.
The campaign didn't have the desired effect, with around one in seven businesses responding to the nudge letter. HMRC has advised us that it received considerably fewer disclosures than anticipated and that, consequently, it has spent time formulating a plan to tackle suspected users of ESS tools.
It has indicated that its new approach will be underpinned by its elite investigation office, the Fraud Investigation Service (FIS). While it's not yet clear whether FIS will be opening investigations immediately, or providing businesses with a second opportunity to make a voluntary disclosure, there's no doubt that HMRC will be taking robust further action.
The vast majority of hospitality and retail businesses are unlikely to be affected by the resurgent focus on tackling ESS-related fraud. We know that HMRC’s approach will be extremely targeted and directed only at those where it possesses information that suggests an ESS tool was purchased. For the small number of traders who may be implicated by the data that HMRC holds, there's a real and pressing need to consider how best to protect themselves.
HMRC is able to utilise its ‘information powers’ to help it check the accuracy of a tax position. These information powers are robust and, while certain taxpayer safeguards exist, where HMRC has reason to suspect a loss of tax, it will use these powers to inspect documents and ‘raid’ business premises. These HMRC actions can occur without any prior warning and even when the business’s tax affairs appear to be in order.
We suspect HMRC will initially consider that anyone identified as a purchaser of an ESS tool will have done so with the intention of manipulating business records to suppress their tax liabilities. The courts have consistently found that where an individual has knowingly and intentionally failed to comply with their tax obligations, it is an act of tax fraud. This fact, coupled with the active involvement of the Fraud Investigation Service, leads us to believe there is a real prospect of HMRC conducting investigations with a view to prosecuting those who have used ESS tools to gain a tax advantage.
While HMRC continues to operate a disclosure facility specifically for ESS, it's our view that the vast majority of ESS tool users would be better served by making use of HMRC’s Contractual Disclosure Facility (CDF).
Making a full and accurate disclosure through the CDF is the only way for implicated individuals to secure immunity from the prospect of criminal prosecution.
If you previously received a ‘nudge’ letter from HMRC that you didn't act upon, your need is likely to be more pressing than most. We strongly encourage you to seek professional representation and to inform your adviser of any ESS tools you've used. Your advisers will be able to provide recommendations based on the facts of your case and guide you through the most appropriate HMRC disclosure facility.
For those who haven't previously received an HMRC nudge letter, our advice remains constant. HMRC has confirmed that it didn't issue nudge letters to every business it suspected of using ESS tools. So if you haven’t previously heard from HMRC, it doesn't mean that you've slipped under the radar. Arguably, it is those traders who haven’t previously heard from HMRC who stand to gain the most by coming forward voluntarily. Any businesses approaching HMRC to make an unprompted, voluntary disclosure to HMRC will have the ability to secure a reduced overall settlement.
Regardless, if you're in any doubt whatsoever as to the accuracy of your tax affairs and whether you may be implicated by the data HMRC holds, we strongly recommend that you seek professional advice. HMRC offers myriad disclosure facilities, all with their own nuances and requirements. Tax dispute professionals deal exclusively with HMRC investigations and disclosures, and will ensure you regularise your tax affairs in the right way, without exposing you to unnecessary tax, interest or penalties.
While the use of ESS tools is a relatively new phenomenon, our tax dispute resolution team has represented several clients who received HMRC’s initial tranche of nudge letters. We understand how HMRC conducts these investigations and our experts are well equipped to guide you through the process. Our team includes several former senior HMRC FIS officers, meaning we understand exactly how to handle investigations and disclosures in a manner that protects clients from the threat of criminal prosecution.
For further insight and guidance, get in touch with David Brindley or David Francis
