What is ESS?
ESS software allows traders to hide trading income by not recording certain sales through the sales till and diverting any card payments for those transactions to a different bank account, which may be off-shore. In this way both the sale and the revenue never appear in the UK business record, leaving an apparently complete and correct electronic account to be reported to HMRC.
Businesses that possess ESS software can be subject to a fixed penalty of up to £1,000. Those who make, modify, supply or promote ESS software can be fined up to £50,000 for each copy of an ESS tool they provide or modify.
HMRC has a list
Following raids on 90 businesses that create and market ESS software in the UK, HMRC put together a list of thousands of potential users of ESS tools.
HMRC is now using that information to write directly to the businesses on its list of ESS users, warning them that it has information that indicates the trader has misused their sales till to hide sales and reduce their tax bill. Each letter has a unique case reference.
The trader is invited to make a full disclosure of the undeclared sales and tax within 30 days of the date of the letter, using the new online disclosure portal especially set up for ESS tool users.
Serious trouble
Any trader in this position is in serious trouble as HMRC view the use of ESS software as tax fraud, which is a criminal offence, and it could prosecute.
However, in most cases, HMRC will pursue a civil settlement to recover the underpaid tax whether that is corporation tax, income tax, VAT, NIC, or all of those.
Making a voluntary disclosure does not absolve the business from the penalties likely to be imposed for:
- Inaccurate VAT, corporation tax or income tax returns
- Failure to notify registration for VAT, corporation tax or income tax
- Off-shore non-compliance, where funds have been diverted off-shore.
These penalties will be at the higher end in all cases as the use of ESS software to suppress sales is a deliberate act, not a mistake.
Time is short
The HMRC letters give the taxpayer only 30 days to make the disclosure using the special online process set up for ESS declarations, so there is not much time to mull-over what to do.
If the taxpayer does not make a declaration within the time period given, HMRC will open an investigation and/ or issue tax assessments, in which case the penalties will be for prompted and deliberate behaviour, so even higher.
Specialist advice
The Chartered Institute of Taxation (CIOT) is advising its members to think carefully about using the online ESS declaration, as this may not be the best route for the taxpayer to take. Where fraud is suspected the taxpayer may get more protection by using the Contractual Disclosure Facility (CDF) or Code of Practice 9 (COP9). Indeed an earlier Agent Update in May 2022 advised agents to direct their clients to use the CDF to make disclosures if they have been involved in any tax fraud or deliberate activity relating to ESS.
Tax advisers need to be aware that handling any HMRC enquiries relating to tax fraud is a specialist area. The Professional Conduct in Relation to Taxation (PCRT) recommends that a tax professional should obtain appropriate assistance from a suitably qualified specialist where they do not have the necessary expertise to deal with the matter themselves.
