Tax fraud can be defined in different ways, including:
- the falsification with the intention to deceive or
- the false representation made knowingly without belief in its truth or
- a misrepresentation made in the absence of actual, honest belief.
Within a business, fraud can occur in:
- the accounting records
- supporting working papers
- tax returns
- tax computations
- communications with a taxpayer
- communications with HMRC.
There are 2 main categories of fraud – extractive and non-extractive.
Extractive fraud is where company cash sales are diverted to another taxpayer’s benefit. As a result, the company’s worth is reduced.
Non-extractive fraud is where the income or gains are recognised but in the wrong tax period. As a result, the company’s worth is increased.
In the UK, HM Revenue & Customs (HMRC) are responsible for the care and management of the UK tax system. Fundamentally, HMRC police the system in order that:
- the correct amount of tax is collected
- from the correct taxpayer
- in the correct tax period.
HMRC have the taxes legislation at their disposal to ensure that this happens.
Types of fraud
Non-extractive fraud includes:
- Sales deferral and purchase anticipation
- Fixed assets charged to revenue
- Commercial reserves/accruals not adjusted in tax computations
- Commercial reserves/accruals allowable in tax computations but over prudent
- “Conservative” stock and work in progress
- Backdating documentation
- Unsupported adjustments to Director’s Loan Accounts
- Anticipated capital allowances
- Cynical “tax planning” between connected taxpayers
Extractive fraud includes:
- Fictitious purchase invoices or expenditure
- Altered invoices or false descriptions
- The use of bogus offshore companies
- The treatment of private expenditure as business
- Dummy employees
- Unrecorded asset sales
- Returned goods
- The uncontrolled use of contra accounts