Running a business is not always easy no matter how many staff you employ or what procedures you have in place. When there is too much to be done in the time and within the resources available, confusion and misunderstandings can easily occur. The result is inevitably mistakes. Or was it deliberate? Is it tax fraud?
What is tax fraud?
A good question deserves a good answer. HMRC is not consistent in its definition in fact it has had three definitions: evasion, the hidden economy and criminal attacks. That said, in every case, HMRC states that the law has been broken (which is not the case in tax avoidance). Tax fraud is interchangeable with tax evasion.
HMRC does not accept that there can be “accidental tax fraud”. Tax fraud is deliberate. According to HMRC, taxpayers always know what they are doing. An interesting theory.
In the beginning
As human beings, we can make mistakes. Mistakes are accidental, not deliberate. Mistakes can be rectified. For example, an expense is claimed twice. Both get paid. Is that one-off mistake tax fraud?
If the mistake is later identified but nothing is done to correct it, attitudes may begin to change. Further, suppose the taxpayer (sic) realises the mistake and does the same thing again, deliberately.
These can be personal items paid for by the company on behalf of say a Director. On the face of it, not necessarily a problem at this stage. However, if these payments are then treated as business items, now the problem starts. Perhaps they should have been charged to a Director’s Loan Account instead or treated as a Benefit in Kind.
A regular example is the use of the company’s staff and materials on personal homes or other properties owned personally, not by the company, being treated as business items.
Regularity, deliberately and misrepresenting the true facts
These are the hallmarks of tax fraud. Continuing with the example of the Director, it is important to check periodically the transactions that are in a Director’s Loan Account as much as those transactions that are not there.
Likewise, has any of the income of the business been paid to the Director?
In this scenario, a creditor can offer to pay the Director personally for work done etc. in an attempt to avoid paying the VAT. Omitting sales is also tax fraud.
The tax gap
There have been various estimates at measuring the tax gap in the UK. The tax gap is the difference between what is collected as tax revenues compared to what should be collected as tax revenues. The tax gap is approximately £35 billion a year. Whatever the cost is, it is estimated that approximately half the tax gap derives from tax fraud.
How HMRC responds to tax fraud
HMRC tackles tax fraud by challenging taxpayers. Most challenges are by a tax investigation where HMRC quotes the relevant legislation. Nudge letters on the other hand will not quote any legislation. They are fishing exercises. Likewise, Information Notices under Schedule 36 Finance Act 2008 can also sometimes be regarded as fishing exercises.
Have you made a mistake?
It is vital that any taxpayer who has made an innocent mistake takes steps to correct matters, otherwise you can quite easily be on a slippery slope to committing tax fraud.
Has there been any confusion or misunderstanding?
Do you need my help in rectifying any mistakes?