When the mob, brandishing “Stop the Steal” and QAnon banners, descended on the US Capitol building on 6th January 2021, something was clearly amiss. Aside from a thin line of brave Capitol Police officers, it soon became apparent that protection for the US Senate and House of Representatives was conspicuous by its absence.
Emboldened by the lack of security, the pro-Trump protestors broke down doors and windows, and rampaged through the corridors of power, while the world looked on aghast at what had become an attempted insurrection.
Few invaders attempted to hide their faces. On the contrary, many posed for the cameras, joyfully displaying plundered sacred treasures such as House Speaker Nancy Pelosi's lectern.
So brazen was the theft and criminality, it was as if the perpetrators genuinely believed they were above the law; they were untouchable.
The FBI disagreed. In the aftermath, the bureau systematically reviewed the vast reels of video footage and started to knock on doors. As of 23rd February, federal prosecutors revealed that they had charged 275 people and opened over 400 investigations.
Does the same fate await those who committed tax fraud during the pandemic?
The fact that the rioters calmly walked away from Capitol Hill didn’t mean they had got away with their actions. And the same will most likely apply to those who committed tax fraud during the chaos caused by the pandemic.
When the UK economy came to a shuddering halt in March 2020, Chancellor Rishi Sunak began dishing out money like confetti and the HMRC investigators stepped back.
Without unprecedented financial assistance, businesses would surely collapse and millions would be come unemployed. The overriding priority was to save the economy with tax holidays, grants and loans, and many essential checks and balances were brushed away.
The government response was vital lifeline for many businesses, but also an opportunity for the less scrupulous.
Like the Capitol invasion, it was all too easy.
Coronavirus Job Retention Scheme (Furlough)
The big policy announcement by Chancellor was the launch of the furlough scheme, where the government provided the funds for businesses to retain staff on 80% of their usual wages (up to £2,500 per month). The number of employees furloughed peaked at just under 9 million people, around one in four of UK employees.
Furloughed staff were not permitted to do tasks or activities that make money for their employer (or an organisation linked to their employer). But for many, the temptation to effectively use their employees as virtually free labour was too much to resist. Claiming furlough money for working employees is fraudulent use of government money.
A study by group of economists from Cambridge, Oxford and Zurich universities last summer found that two-thirds of workers who were placed on furlough continued to work for their employer.
Jim Harra, HMRC’s chief executive, told the Treasury select committee on 8th April 2020: “We are going to be paying out a vast sum of money in a rapid period of time. Any scheme like this is a target for organised crime. Any scheme that pays out I’m afraid attracts criminals that want to defraud it and people that are genuinely entitled to it who inflate their claims.”
Bounce back loans
In order to keep small businesses afloat, the government offered a host of grants and loans, including ‘Bounce Back loans.’ Over a million small businesses struggling due to coronavirus applied for a 100% state-backed loan worth up to £50,000, with no interest charged or repayments needed in the first 12 months.
With the haste to dispense the loans, the usual criteria for borrowing were dramatically loosened - and the criminal fraternity greedily eyed up the free money. Many businesses signed up for the loans without any intention or means of paying them back.
A senior banker told the FT, “the scheme was being abused and defrauded on an industrial scale.”
Another senior banker declared: “The period from April to June was essentially a giant bonfire of taxpayers' money, with banks just handing out matches.”
How much was lost to fraud? It’s hard to know. A Parliamentary Committee report from December reported: “The focus on speed of delivery has exposed the taxpayer to potentially huge losses, estimated in the region of £15 billion to £26 billion. According to the Department for Business, Energy & Industrial Strategy, the majority of these are credit losses, where the borrower wants to repay the loan but cannot, but Government lacks data to assess the levels of fraud within the Scheme.
Payment extensions and HMRC ‘leniency'
As the Chancellor introduced Covid loans, grants and the furlough scheme, the HMRC adopted a lenient, light-touch approach. In an attempt to loosen personal and business liquidity, payment deadlines for VAT and PAYE were extended, while routine tax compliance checks were put on hold.
A Freedom of Information (FOI) request by BDO revealed that HMRC dropped the launch of new tax probes by more than 50% after the coronavirus crisis first erupted, to focus on implementing the UK government's covid-19 plans.
Between March and July 2020, HMRC initiated 61,000 tax investigations compared to128,000 inquiries opened over the same period in 2019.
While this was a welcome respite for struggling businesses, for the less scrupulous it was an invitation to build up tax bills, with the intention of folding before the authorities clamped down.
Scams and phishing
Chaos creates opportunity for crime. The pandemic created a wave of fear and confusion - an ideal environment for scammers.
Another FOI request, this time by Saffery Champness, uncovered the worrying statistic that taxpayers reported 9,948 Covid-related scams to HMRC up to June 2020.
The pandemic has been a lucrative opportunity for scammers, furlough cheats, deceitful bounce back borrowers and tax evaders.
The question is whether or not they will get away with it.
It is inconceivable that HMRC will stand aside while con artists and criminals syphon money away from the public purse. It is under pressure to recoup some of the money handed out during the pandemic which is leading to increased investigation activity. But does it have the resources to pursue the minor offenders?
The most prevalent fraud has occurred with the CJRS (furlough) scheme, where employees have been made to work illegally.
On 9th July 2020, HMRC issued a press release announcing that a 57-year-old man had been arrested as part of an investigation into a suspected £495,000 CJRS fraud. It intended as a warning shot to those who were breaking the rules. But the case was revealing in the scale of the offence.
It was an investigation into a multi-million pound tax fraud and alleged money laundering offences, involving the deployment of more than 100 HMRC officers. This was high-level organised crime, not a probe into a boss of a SME asking his staff to take their laptops home with them.
In terms of general furlough abuse, the main HMRC tactic seems to be to ask the public to inform on the perpetuators. Perhaps this makes sense - there could be plenty of disgruntled redundant employees happy to become whistle-blowers against their former employers. Last June, HMRC announced that it had received over 1,900 reports of fraudulent furlough claims from company employees.
In the case of the bounce back loan scheme, the first line of attack against fraudulent borrowing may come from the banks who administered the loans. When it comes to repayments, the government has made it clear that the banks will need to do their best to recover the money. There is an assumption that the government will only get involved to tackle high value or profile cases, or where there are clear links to organised crime.
Last summer, HMRC declared: “We will continue to prioritise tackling serious fraud and criminal attacks on the tax system, while increasing wider activity to make sure individuals and businesses pay the right tax, where that is feasible for HMRC and the customer.”
If the focus has so far been on serious crime, does that mean that minor offenders are safe? It would be unwise to make this conclusion. The HMRC statement was made when the overriding priority was to save the economy. Once the economy revives, many will find that HMRC has a long memory.
HMRC has stressed that where there is egregious abuse which could constitute fraud on the UK Government, it will not hesitate to take criminal action. It has the power to carry out searches of home and business premises under a warrant. The Finance Bill 2020 includes powers for HMRC to pursue company office holders in the case of businesses becoming insolvent, with joint and several liability.
In other words, the HMRC has the tools and the power - it is a case of when they decide to use them.
During the Capitol riots, the FBI was presented with plenty of low-hanging fruit, such as Jake Angeli, the bare-chested QAnon Shaman with a painted face, fur hat and horns. It wasn’t hard to find Mr Angeli. But there are still hundreds of less flamboyant invaders who are waiting for the nervously for the dawn raid, and it will inevitably come. The Covid tax evaders will have a similar nervous wait, once HMRC gets its mojo back.
Investigators in demand
Such is the scale of fraudulent activity, the government has a mountain to climb. In December the Public Accounts Committee was scathing, reporting that the government does not have a counter-fraud strategy for the Covid schemes and has not identified what types of fraud it will prosecute.
This will not continue. The government will need to reclaim the money for financial and reputational reasons. The HMRC will need more tax investigation professionals. And businesses will need tax experts to ensure they properly comply.
Tax investigation skills have never been in more demand. If you have this skill set, please get in touch, and we will use our networks to find you the perfect role. It’s going to be busy!
Ed Moore is a Senior Consultant in the Tax Division at Harvey John.
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