Many years ago, as an inexperienced investigator working for HMRC, it was drilled into me to ‘follow the cash’. Consequently, businesses operating in hospitality and retail sectors were subject to more than their fair share of investigations. Now, despite cash use becoming sparser, HMRC’s spotlight still remains on these sectors – largely due to the uncovering of ESS tools being used to manipulate sales records and artificially suppress tax liabilities.
What is electronic sales suppression?
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 ESS.
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’s developing approach to ESS-related fraud
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 them. 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 the FIS. It will start with a final series of nudge letters, before targeted compliance activity which could include criminal investigations, Code of Practice 9 investigations (a civil enquiry alleging fraud) or compliance interventions.
How will this affect the hospitality and retail sectors?
The vast majority of hospitality and retail businesses are unlikely to be impacted by the latest iteration of nudge letters. HMRC could already have the information on who they believe used ESS so it’s vital those who receive a letter seeks urgent professional help in responding. 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’s an act of tax fraud. This fact, coupled with the active involvement of the FIS, leads us to believe there’s a real prospect of HMRC conducting investigations with a view to prosecuting those who have used ESS tools to gain a tax advantage.
Securing protection through HMRC voluntary disclosure
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.
What should you do next?
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 advisor of any ESS tools you've used. Your advisors will be able to provide recommendations based on the facts of your case and guide you through the most appropriate HMRC disclosure facility.
If you haven't received an HMRC nudge letter, but have used ESS tools, it’s still important to act. HMRC has confirmed that it didn't issue nudge letters to every business where it has suspicions, so it doesn't mean that you've slipped under the radar. Arguably, it’s those traders who haven’t already heard from HMRC who stand to gain the most by coming forward voluntarily. Any business making an unprompted, voluntary disclosure will have the ability to secure a reduced overall settlement.
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.
How we can help
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 Francis.
