Fraud Blog Episode 4: Stealing from the State – Crown Fraud
So far in this series we have looked at factoring fraud, grant fraud, and frauds against banks and other lenders.
In this week’s final episode we focus on fraud concerning Crown monies, in particular the non-payment of tax liabilities.
The consequences of crown fraud
There are significant consequences for businesses and individuals who do not pay their tax liabilities. It deprives public services of the funds they need to survive. The shortfall in uncollected tax revenue must be made up elsewhere, therefore leaving society worse off.
In the 2016/17 tax year, HMRC estimated that the “tax gap”, i.e. the difference between tax owed to HMRC and the amount actually paid to HMRC, was £33 billion. The largest portion of the tax gap usually comes from amounts due from small businesses. Taxpayer error, criminal intent, and underpaid National Insurance Contributions and VAT also play a significant part.
What happens after the fraud?
When business owners do not pay their tax liabilities, they often use the funds to sustain short term trading instead. Examples of this would be paying themselves a salary, or paying another creditor (a classic example of robbing Peter to pay Paul). By withholding money owed to HMRC, perpetrators are effectively treating their tax liabilities as a loan they can pay off on their own terms.
In many cases, the withheld funds act only as a temporary lifeline to businesses that may already be insolvent. When a Liquidator is appointed to wind up the business and realise its assets, HMRC is usually the majority creditor and stands to gain the most from these proceedings. However, the business is often severely in debt and has insufficient assets to enable a repayment in full.
Additionally, these businesses owners frequently incorporate a new company and repeat the process. Serial offenders have been known to repeat this procedure every time a company fails. This results in HMRC chasing a never-ending series of dead-ends that will not help them recoup the amounts they are due.
When directors of liquidated companies are found personally liable for their company’s demise, they can be fined. If it is not their first offence, they can be disqualified as acting as a company director for years. However, by this stage, the damage has often already been done.
What to do if you suspect crown fraud
If you suspect that a company or individual is not paying the taxes that they owe, you can report this to HMRC.
HMRC rewarded tip-offs in the 2015/16 tax year by paying £605,000 to the whistle blowers who alerted them to illegal activity. If you would like to read more on tax avoidance and tax evasion in our previous blogs, please visit our website.
We hope that you have enjoyed our series of blog posts concerning a number of frauds that can affect businesses. If you would like to read more publications by our Forensics department, pleaae visit the publications section of our website.
Please contact our Forensic specialists on 0191 285 0321 to discuss any of these topics further.
1 – A Web of Deceit
2 – Misappropriation And Misuse: Grant Fraud
3 – Modern Day Bank Robbery: Exploiting Lenders
4 – Stealing From The State: Crown Fraud