HMRC used to focus on cash sales when looking at businesses declaring suspiciously low turnovers. Now, thanks to the decline of cash – exacerbated by COVID-19 – there has been a rise in businesses using electronic sales suppression (ESS) tools to falsify their sales records.
Electronic sales suppression involves hiding the true amount of sales or the true value of sales with ESS software, hardware, or computer code scripts. This is done at or after the point of sale, with the electronic records appearing to be credible and compliant, while really reducing the amount of tax that the business should be paying.
This counts as tax evasion, so HMRC is cracking down on individuals and businesses who use ESS tools to commit tax fraud. Criminal investigations into ESS can result in financial penalties and even prison sentences – so time is running out for anyone who has used ESS tools to reduce tax to come clean to HMRC.
What are the penalties for ESS?
HMRC has legal powers to request certain documents and information from individuals and businesses to confirm their tax position. If the person or company does not comply with a notice from HMRC, the tax agency can open a full investigation – and if evidence of electronic sales suppression is found, HMRC can charge them with significant penalties.
Penalties can apply whether you are in possession of an ESS tool, or made, supplied, or promoted an ESS tool. You don’t need to have actually used an ESS tool to suppress your sales or actively avoid tax; possessing or distributing the tool, or even trying to access one, is enough to warrant a penalty.
Penalties for possessing ESS tools
The initial penalty for possessing an ESS tool is up to £1,000, plus up to £75 a day until HMRC is satisfied that the taxpayer no longer possesses the tool. The daily penalties can run up to a maximum of £50,000. Of course, this is all in addition to the avoided tax that must be paid back – including any fraudulent VAT, income tax, or corporation tax reductions.
The taxpayer may be able to avoid the initial penalty if they can prove that the tool is no longer in their possession within 30 days
of receiving the notice from HMRC. However, if the taxpayer has already been subject to a similar penalty before, HMRC will enforce the fixed penalty.
HMRC can also charge further penalties for filing inaccurate tax returns, providing false information, and failing to notify the tax agency of taxes due. As card payments for unreported sales are often routed through offshore bank accounts, it can be difficult to prove that concealing such information wasn’t a deliberate act of tax fraud.
Penalties for making, modifying, supplying, or promoting ESS tools
The penalties for creating or distributing ESS tools are a little more complicated. HMRC may not charge an initial penalty if you can prove that you weren’t aware the tool was intended for electronic sales suppression, or if you have already been criminally convicted for your involvement.
HMRC can charge a maximum penalty of £50,000 per incident of making, supplying, or promoting an ESS tool, but the penalty will typically be a percentage of this amount. The percentage will be calculated based on the complexity of the ESS tool and whether the fraudulent activity was disclosed voluntarily or following prompts from HMRC:
|
Complexity of the ESS tool |
Unprompted disclosure |
Prompted disclosure |
|
Low |
10% – 40% |
20% – 40% |
|
Medium |
30% – 80% |
45% – 80% |
|
High |
50% – 100% |
70% – 100% |
If you make a ‘quality disclosure’ – working as honestly and co-operatively as possible with HMRC to provide all the information requested – then the tax agency may reduce the penalty. If the maximum reduction available is 100%, HMRC may offer 30% for telling them about the tool and your involvement, 40% for helping to identify others involved in spreading the tool, and 30% for giving them access to records of users, suppliers, and promoters.
Should your business disclose ESS?
The best way to avoid such penalties from HMRC is to not use or engage with ESS tools at all. You should not install ESS tools on any devices, configure settings within electronic point-of-sale (EPOS) systems to activate ESS, or access someone else’s ESS tool in any way.
Of course, you should also be maintaining complete and correct financial records for your business activities. This will ensure that you don’t accidentally under-report your turnover, and will make it easier to provide the required evidence if you do receive a notice from HMRC.
You can find detailed ESS guidance on the government website. If you have been involved with electronic sales suppression, whether accidentally or intentionally, the government is allowing voluntary ESS disclosures about misusing till systems until 9th April 2023
– doing so could reduce any penalties you may be liable for.
Should you need professional assistance with bookkeeping and VAT, or managing HMRC enquiries
and tax investigations, you can turn to GBAC. Our accountants in Barnsley, and Leeds, work with individuals and businesses of all sizes to provide efficient tax management services – so get in touch today to learn how we can help you.