BLOG: Find out about the new fraud, like the old fraud
Mark Watson reviews the latest budget and voices his concerns about the potential for abuse and the government’s response.
Chancellor of the Exchequer, Rishi Sunak, delivered the budget which he hopes will enable the UK to emerge financially from the Covid-19 crisis.
What is clear from the budget and the new incentives that have been introduced is that businesses are targeted to be stimulated by a wide variety of tax relief schemes, financial support, etc. In a broader sense, the main focus of the budget is unsurprisingly stimulation and growth, not just for business but for the economy as a whole.
The leave period has been extended, rebound loans (“BBL”) and coronavirus business interruption loans (“CBIL”) will be replaced, and businesses will be able to claim sweeping tax breaks.
However, as has been widely recognized in the past, the rapid introduction of programs that allow these types of relief to be accessed quickly and without much oversight makes them extremely vulnerable to abuse.
David Clarke, chairman of the Fraud Advisory Group, said: “It now appears that up to £ 43bn has been spent on rebound loans in total,Clarke continued, “anything up to half or 75% of this amount may not be refunded, and it is possible that half of this amount was paid to people who were not entitled to this amount.“
It is one plan among many others. This single figure demonstrates the loss but also the risk of loss and the relative ease of abuse of regimes.
A number of programs appear vulnerable to abuse.
From April 1, 2021 to March 31, 2023, companies investing in new eligible plants and machines will be able to claim:
- a capital deduction of 130% on eligible investments in plant and machinery
- an allowance of 50% in the first year for assets eligible for a special rate
The super-deduction will allow businesses to reduce their tax bill by up to 25p for every £ 1 they spend.
Investments in assets eligible for capital allowances at the main rate of 18% will benefit from the 130% allowance, while investments in assets at special rate will benefit from a deduction of 50% in the first year.
The implications of this relief are striking. This will not only allow businesses to fully offset the amount spent on qualifying plant and machinery, but they will be rewarded for doing so.
It appears that the restrictions on “eligible” plant and machinery are similar to the existing rules. Equipment must be new, not used. Normal exclusions for cars, rental assets, ships, related party transactions and standard anti-avoidance provisions apply. There are special rules for the oil and gas industry.
There is no risk to a business if it purchases facilities and machinery eligible under the 130% relief program, which would previously have benefited from an 18% relief.
In addition, with regard to the 50% reduction in the first year of special assets, the risks of abuse are greater. This will not only apply to a large number of new installations and machinery that would previously have received a 6% reduction, but also applies to lifetime assets such as insulation and air conditioning in a building.
The risk of abuse of this relief is clear.
If a company got a non-recourse or limited recourse loan of £ 50,000, then used that loan and £ 10,000 of its own capital and purchased fixtures and machinery that qualify at either level of repair for £ 60,000 , the business could claim on the loan and make a profit of £ 20,000 or £ 78,000 with no repayment required on its loan or with a very limited repayment, depending on the terms of the loan.
Emergency postponement in the event of a disaster
Currently, a company that experiences a business loss during an accounting period can apply to offset this loss against the profits of the last 12 months, after allocating those losses to the profits of the accounting period in which the losses were incurred. incurred. There is no limit on the amount of loss that can be carried over to the previous year and offset.
This will be extended to a period of three years now and is limited to the period from April 01, 2020 to March 31, 2022.
The amount of loss attributable to the previous year remains unlimited. However, under the new regime there will be a limit of £ 2million on losses that can be carried over to the previous two years.
This lateral loss relief regime has always been vulnerable to the artificial creation of business debt losses.
Take the example of a business investing £ 100,000 from its own £ 20,000 capital and non-recourse loans of £ 80,000 into a business involved in films, carbon credits, wine, etc.
The investment fails, resulting in an apparent book loss for the business of £ 100,000. Therefore, the compensation claim will allow the company to receive £ 45,000 but will not have to repay the £ 80,000 loan due to the terms of the loan.
For the £ 20,000 provision, the company incurred an accounting loss but realized £ 45,000.
These patterns are well known and have been widely documented. These schemes took advantage of the previous system where compensation was only allowed for the previous year. Now that the scheme has been extended to three years, one can guess the future of side tax relief abuse in the future and the ability to monitor such abuse.
Recovery loan program
The Stimulus Loan Program is intended to provide businesses of all sizes with access to loans and other sources of finance of up to £ 10million per business, once existing Covid-19 loan programs are closed . Applications under the BBL and CBIL schemes were closed in January 2021.
Anywhere between £ 25,001 and £ 10 million can be claimed per business, as well as invoices and asset finance available between £ 1,000 and £ 10 million per business.
Loans and asset finance facilities will have terms of up to six years and overdrafts and finance bills of up to three years.
With facilities up to £ 250,000 there is no need 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 negotiating with the UK, is or would have been viable without Covid-19, has been affected by Covid-19 and is not subject to collective insolvency proceedings.
The loans should be used for legitimate business purposes. This could include goals such as growth or investing or paying a salary.
This is almost a carbon copy of the eligibility criteria for BBL. However, only 80% of the loan is secured.
BBLs were capped at £ 50,000 each and under the recovery loan scheme a maximum of £ 10million can be claimed.
These could also be used for legitimate business purposes, which could include paying a salary to the business owner, for example.
I’ve written about the vulnerability of BBL before and it looks like not only are payback loans just as vulnerable, but now the rewards available for abusing the new system are much, much more appealing.
The Taxpayer Protection Working Group was announced by Mr. Sunak as a dedicated working group within HMRC. Its sole objective will be to fight against fraud in all the Covid-19 support and relief programs put in place by the Government and to “crack down on tax evasion and fraud», According to the Chancellor.
The task force will receive an investment of £ 100million and 1,265 staff to populate it.
An additional £ 180million is going to be invested in HMRC in general to bring in additional resources and new technology to help it.
This all sounds, initially, great from a taxpayer public perspective, which is oddly reminiscent of former Prime Minister Tony Blair’s phrase on “severe against crime, severe against the causes of crime“.
But the approach seems to be upside down.
Funding a task force to fight fraud after the money has already been paid, rather than improving security around paying the money in the first place, is akin to setting up a group working to combat the causes of the stable door open after the horse has already been left.
The most prominent example of this approach is that of the loan recovery program. Instead of making the application process and eligibility criteria more onerous, 1,265 HMRC staff will need to review a small business’s accounts to try and assess whether a particular expense incurred by the manager for a coffee machine was a legitimate business expense or not.
If anything, the system is much more at risk than its ancestor, the BBL scheme. Now those looking to abuse payback loans will be after a pot of up to £ 10million, rather than £ 50,000.
There is no doubt that businesses need support throughout the pandemic, but it looks like what this new round of relief is doing, rather than protecting taxpayer revenues, is opening the doors to more attempts at it. abuse.
For businesses, cash today may well mean investigation later.
More effective protection of taxpayer incomes, while supporting businesses, could have been to make the oversight of the provision of relief more rigorous, saving businesses and revenues in the long run rather than a seemingly unreliable solution. not solve the central problem.