BLOG: Meet the new fraud, same as the old fraud

Mark Watson considers the latest Budget and outlines concerns about the scope for abuse and the response from the Government.

The Chancellor of the Exchequer, Rishi Sunak, has delivered the budget that he hopes will bring the UK out of the Covid-19 crisis, financially.

What is clear from the budget and the new incentives that have been introduced is that businesses are being targeted for stimulation through a large variety of taxation relief schemes, financial support and so on. In a wider sense, the main point of the budget unsurprisingly is stimulation and growth, not only to business but the economy as a whole.

Furlough has been extended, Bounce Back Loans (“BBLs”) and Coronavirus Business Interruption Loans(“CBILs”) will be replaced, and businesses will be able to claim wide-ranging tax relief.

However, as has been identified very widely in the past, the rapid introduction of schemes to allow access to these types of relief quickly and without much oversight makes them extremely vulnerable to misuse.

David Clarke, Chairman of Fraud Advisory Panel, said “It now looks like up to £43bn went out as Bounce Back Loans in total,” Clarke continued: “anything up to half or 75% of that might not get repaid, and it’s possible that half that amount was paid to people who weren’t entitled to that amount.”^[1]

That is one scheme out of a whole host of others. This single figure demonstrates the loss but also the risk of loss and relative ease of abuse of the schemes.

A number of the schemes appear vulnerable to abuse.

Super-Deduction

From 01 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:

• a 130% super-deduction capital allowance on qualifying plant and machinery investments
• a 50% first-year allowance for qualifying special rate assets

The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they spend.

Investments in assets qualifying for capital allowances at the 18% main rate will benefit from the 130% allowance, whilst investments in special rate assets will benefit from a 50% first-year allowance.

The implications of this relief are stark. This will allow companies to not only completely offset the amount spent on qualifying plant and machinery but they will be rewarded for doing so.

It appears that the restrictions on “qualifying” plant and machinery are similar to existing rules. The equipment must be new and not second-hand. The normal exclusions in relation to cars, assets for leasing, ships, connected party transactions, and the standard anti-avoidance provisions apply. There are special rules for the oil and gas sector.

There is no risk to a business if it purchases qualifying plant and machinery under the 130% relief scheme, which would have previously enjoyed 18% relief.

Further, in relation to the relief of 50% in the first year of special assets, the scope for abuse is wider. Not only will this apply to a great deal of new plant and machinery which would have previously enjoyed 6% relief, but also applies to lifelong assets such as insulation and air-conditioning in a building.

The risk of abuse of this relief is clear.

If a business obtained a non-recourse or limited-recourse loan for £50,000 and then used that loan and £10,000 of its own capital and purchased plant and machinery that qualified for either tier of relief for £60,000, the business could claim on the relief and make a profit of either £20,000 or £78,000 with either no repayment required on its loan or very limited repayment, depending on the terms of the loan.

Loss Relief Carry-Back

Currently a business that is incurring a trading loss within an accounting period can make a claim to offset that loss against the profit of the last 12 months, having set those losses against the profits from the accounting period in which the losses were incurred. There is no limit on the amount of loss that can be carried back to the previous year and offset.

This will be extended to a period of three years now and is limited to the period 01 April 2020 to 31 March 2022.

The amount of loss that can be apportioned to the preceding year remains unlimited. However, under the new regime, there will be a limit of £2 million on losses that can be carried back to the earlier two years.

This regime of sideways loss relief has always been vulnerable to the artificial creation of trading losses through borrowing.

Take an example of a business which invests £100,000 sourced from its own capital of £20,000 and non-recourse loans of £80,000 into a company that is involved in films, carbon credits, wine and so on.

The investment fails triggering an apparent accounting loss for the business of £100,000. Therefore, the offset claim will allow the business to receive £45,000 but will not have to repay the loan of £80,000 due to the terms of the loan.

For the provision of £20,000, the business has experienced an accounting loss but netted £45,000.

These schemes are well-known and have been widely documented. These schemes took advantage of the previous system where the offset was only allowed for the previous year. Now that the scheme has been extended to three years, one can guess about the future for sideways tax relief abuse in the future and the ability to monitor such abuse.

Recovery Loan Scheme

The Recovery Loan Scheme is intended to allow businesses of any size to access loans and other sources of finance of up to £10 million per business, once the existing Covid-19 loan schemes close. The applications under the BBL and CBIL schemes closed in January 2021.

Anywhere between £25,001 and £10 million can be claimed per business along with invoice and asset finance available between £1,000 and £10 million per business.

Loans and asset finance facilities will consist of terms of up to six years and overdraft and invoice finance for up to three years.

With facilities of up to £250,000, there is no requirement to provide personal guarantees.  

80% of the facility provided by the lender will be guaranteed by the Government.

A business will be able to apply for a loan if the business is trading with the UK, is viable or would have been if not for Covid-19, has been affected by Covid-19 and is not in collective insolvency proceedings. 

The loans must be used for any legitimate business purpose. This could include objectives such as growth or investment or paying a salary.

This is almost a carbon copy of the eligibility criteria for BBL. However, only 80% of the loan is guaranteed.

BBLs were limited to £50,000 each and under the Recovery Loan Scheme a maximum of £10 million can be claimed.

These could be used for legitimate business aims as well, which might include paying a salary to the business owner for example.

I have written about the vulnerability of BBLs previously and it appears that not only are Recovery Loans just as vulnerable, but now the rewards available through abusing the new scheme are much, much more enticing.  

Taskforce

The Taxpayer Protection Taskforce was announced by Mr Sunak as a specialist taskforce within HMRC. Its sole purpose will be to combat fraud across all Covid-19 support and relief schemes introduced by the Government and to “clamp down on tax avoidance and evasion”, according to the Chancellor.

The taskforce will receive an investment of £100 million and 1,265 staff to populate it.

A further £180 million is going to be invested in HMRC generally to bring in extra resources and new technology to assist.

Conclusions

This all sounds, initially, great from the perspective of the taxpaying members of public, sounding oddly reminiscent of former Prime Minister Tony Blair’s soundbite of “tough on crime, tough on the causes of crime”.

But the approach appears the wrong way round.

Financing a taskforce to combat the fraud after the money has already been paid out, rather than improving the security around paying the money in the first place is akin to the implementation of a taskforce to combat causes of the open stable door after the horse has already left.

The most striking example of this approach is that of the Recovery Loan Scheme. Instead of making the application procedure and the eligibility criteria more onerous, there is going to be a further 1,265 HMRC staff having to pore over the accounts of a small business trying to assess if a particular expense incurred by the director for a coffee machine was a legitimate business expense or not.

If anything, the system is at far more risk than its ancestor, the BBL scheme. Now, those seeking to abuse Recovery Loans will be after a pot of up to £10 million, rather than £50,000.

There is no doubt that businesses need support throughout the pandemic, but it seems that what this new raft of relief is doing, rather than protecting taxpayer revenue, is opening the gates wider to more attempts of abuse.

For businesses, cash today could well mean an investigation later.

A more efficient protection of taxpayer revenue, whilst supporting businesses, might have been to make the oversight of the provision of the relief more rigorous, saving businesses and revenue in the long run rather than a solution that appears not to tackle the core issue.  

Mark Watson is a member of Carmelite Chambers who specialises in financial crime and was called to the Bar in 2011. He defended in the largest counterfeit cigarette production operation that HMRC has ever prosecuted and is developing an early practice in Covid related payment frauds. He is also an elected member of the Criminal Bar Association Executive Committee.

^[1] https://www.icaew.com/insights/viewpoints-on-the-news/2021/mar-2021/sunak-launches-100m-covid-fraudster-taskforce