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Deliberate Defaulters – are you in an HMRC ‘hot spot’?

Gary Brothers, Partner at Independent Tax, picks the bones out of HMRC’s Deliberate Defaulters list

As we know, HMRC routinely carries out huge numbers of compliance checks (or enquiries and investigations in real speak) to ensure a customer is paying the right amount of tax at the right time.

These worrying and serious letters from HMRC have an uncanny knack of landing on the doorstep on a Friday or Saturday, ruining any plans for a relaxing weekend. Ironically, just as the anxiety level increases whilst reading these letters, you try to contact your trusted accountant or advisor, only to find that you can’t contact them until a fretful Monday morning! 

Why are compliance check letters important?

During the course of a tax investigation, if HMRC establishes that any errors or their findings show the client has ‘deliberately’ got their tax affairs wrong, then the client is classed as a ‘Deliberate Defaulter’ by HMRC.

Subject to, we suggest, a fairly flimsy safety net, HMRC can then publicly name and shame the client by publishing their details, such as names, addresses, amounts taken or assessed etc., on their very own Deliberate Defaulters List and for the whole world to see – the tax office also takes this approach to promoters of tax avoidance.

So what value is this naming and shaming list?

At its instigation, HMRC undoubtedly hoped that the risk of publishing would persuade clients subject to investigation to embrace the investigation, cooperate fully and sort out, quickly, any problems, thus removing themselves from the risk of publication. Many clients do, of course, but those that don’t can end up on this list.

But is anyone really that bothered?

Concerningly, we have noticed a trend both in our professional connections and in discussions with clients that is, we think, not surprising. 

Statistics show that only 28% of the general UK public are aware, in any way, of the publication of the naming and shaming list as a potential consequence of an HMRC investigation. That is hardly an impressive number given HMRC’s hope that the fear of publishing will positively influence clients subject to investigation.

What we also find more peculiar about the list and its supposed value, is that the Deliberate Defaulters list that’s published, as any contact with forums such as LinkedIn will show, seems to have become little more than an opportunity for tax professionals like us to hook an article of some sort onto the Defaulters List, usually on a “don’t end up on this list, contact us we can help” type angle!

At the moment there is no strong evidence that we have seen, either from HMRC or anecdotally in the profession, that publishing the information, or the risk of it acts as any sort of deterrent, other than rare examples.

What do the statistics say?

So, trying to avoid the rather hackneyed “don’t end up on this list, contact us we can help” marketing type approach, we thought it might be more insightful to consider the data that the list actually gives us and what it tells us.

The current list of Deliberate Defaulters was published on 21st March 2022, for cases concluded between 17th June 2021 and 18th November 2021. 266 Deliberate Defaulters made the list. 

These include defaulters from outside the UK, too – the Americas with 1, Asia with 4 and Europe with 22. Typically, those from Europe are involved in the transport sector, mainly haulage businesses or HGV drivers. 

Scotland and Northern Ireland have 14 each on the list, and there are only 9 defaulters from Wales. England has 195 defaulters.

The English breakdown ranks regions by purely numbers and is published by reference to the tax/duty assessed:

RegionCase CountTotal amount of tax/duty (£)Penalties charged   (£) %
 
London6432,709,562.7021,384,924.0965.4
South East273,933,712.681,964,121.6849.9
West Midlands243,810,817.452,532,379.6466.5
North West273,205,936.361,952,904.3360.9
East of England103,129,418.521,857,731.8259.4
Yorkshire and the Humber161,752,371.181,168,391.0166.7
North East131,582,780.73998,402.3563.1
South West9810,061.66401,029.5149.5
East Midlands5728,027.41454,693.8662.5

The capital not only has the most Deliberate Defaulters (64) but also the highest amount of tax duty (£32.7m) and penalties (£21.3) charged – whether this is actually recovered, though, is for another article, another day.

If we look only at the number of defaulters, then both Yorkshire and the Humber (16) and the North East (13) rank above East Midlands. However, with fewer defaulters, the East Midlands moves up the table when averaging the tax/duty charged with an average of £312,941 per defaulter. But this is still some way short of the London average, which comes in at £511,086 per London defaulter.

From the total of 266 Deliberate Defaulters, HMRC has charged a total of £115,184,953, comprising £70,588,413 of tax and duty, and £44,596,539 in penalties.  

The Building & Construction industry has the highest number of cases of Deliberate Defaulters. However, this is not relative to the total tax duty that has been charged across the sector. Whilst Restaurant & Takeaway businesses account for the highest tax charged by sector, it is in fact the Online Trade business which has a whopping £14,087,092.79 tax charge to only seven cases; over £2 million each, on average.

Historically, restaurants, takeaways, the construction industry and bars have been easy to target (abuse maybe), with fraud cases often involving cash sales.

During the past decade, online companies have boomed, bringing an end to many high street businesses. Furthermore, the pandemic also increased the number of online transactions, with the marketplace consequently booming. With many different platforms for selling, whether on Amazon or eBay, or increasing social media platforms, the online marketplace is huge – and growing. In 2021, the UK was third, only behind China and USA for Retail e-Commerce.

So, which industry has been the most ‘deliberately defaulting’? 

SectorCase CountTotal amount of tax/duty (£)Penalties charged (£) %
 
Building & Construction727,972,954.305,260,214.2965.9
Restaurant & Takeaway3716,163,568.9810,937,905.8367.7
Other328,948,621.315,249,989.7058.7
Transport322,328,843.431,208,478.8751.9
Property & Management162,556,898.831,611,287.5963.0
Food & Drink Wholesale158,949,250.115,544,696.2762.0
Car Sales & Leasing113,502,652.672,039,608.7958.2
Directors & Consultants112,733,002.651,386,063.0050.7
Contractors & Sub-contractors10617,035.97372,325.1760.3
IT & Security81,373,563.521,023,899.3274.5
Online Selling714,087,092.799,238,460.0165.6
Accounting & Tax5669,036.47313,842.7746.9
Hairdressers & Cosmetics4385,596.47224,334.8958.2
Farming & Agriculture4215,634.42134,148.5262.2
Energy284,662.0051,284.2360.1
Total26670,588,413.9244,596,539.2563.2

On average, HMRC have charged a penalty of 63.2% relative to the tax duties collected.  

But what does this tell us about HMRC’s view on where or who is the most ‘dishonest’ or deliberately defaulting in the UK? 

Where is the most ‘dishonest’ place to live?

We can see that in England, London is the most dishonest part of the country with the most cases, 64, based on a simple number count.

However, Yorkshire & Humberside is the most dishonest if judged by the size of the penalties awarded – Yorkshire & Humber folk are the most heavily penalised place in England at 67%. The West Midlands are just marginally behind.

Outside England, Scotland is the most dishonest and heavily penalised country at 64%.

Although Asia has featured fewer times on this list, Asia is the most dishonest part of the world as far as the HMRC published statistics show.

What is the most ‘dishonest’ sector to work in?

If we widen our analysis, then we can see where HMRC are charging the largest ‘deliberate’ penalties and form a view of just how heavily punished those sectors are by HMRC.

IT & Securities is the most punished industry in the UK with average deliberate penalties coming in at a whopping 75% of the duty.

Ironically, but with no doubt at all, and unsurprising to all of our readers, Accounting & Tax is the least dishonest profession. And no, I am certainly not making this up.  

Accounting & Tax also has the lowest deliberate penalty charges at 46.9%, the only one below the magic 50% mark, along with Directors and Consultants (50.7%) and Transport (51.9%) before penalties jump up to 58% and upwards.

Upshot

After years of naming and shaming tax evaders, it appears that the impact of this policy on the general population is minimal, both in terms of the number of taxpayers affected and the extent of the deterrent created.

It is well known that HMRC has set up specialist task forces to combat Restaurants & Takeaways and to deal with Online Sellers through, for example, obtaining their PayPal data.  Given the high penalties charged to these ‘deliberate’ sectors, the continued use by HMRC of targeted task forces seems highly likely.

Whilst the next publication of the Deliberate Defaulters list might seem a little light in terms of value and numbers, we must remember that like the rest of the world, HMRC also encountered interruption due to the pandemic. As HMRC customers begin resurfacing post-pandemic, HMRC is likely to pursue Deliberate Defaulters even more forcefully.

Whilst HMRC will publish information to identify the Deliberate Defaulters,  it will only publish this information once these penalties are final. The law also requires that HMRC does not publish this information for more than 12 months.

A link to the Deliberate Defaulters List can be found here.

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