Types of tax fraud

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
  • accounts
  • tax returns
  • tax computations
  • communications with a taxpayer
  • communications with HMRC.

There are 2 main categories of fraud – extractive and non-extractive.

Examples

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.

Detection

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.

When or where the system fails, HMRC are to challenge taxpayers on either a criminal or civil basis and penalise when appropriate.

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