Electronic Sales Suppression: HMRC Voluntary Disclosure

By Graham | May 6, 2023

HMRC is sending letters to businesses that may not have paid the correct income tax, corporation tax, or VAT due to misuse of their till systems. The letters are intended to provide an opportunity for businesses using electronic sales suppression (ESS) to get their tax affairs in order by voluntarily disclosing undeclared sales to HMRC.

This campaign comes in the wake of a voluntary disclosure service that was open until 9 April, allowing businesses to disclose their use of ESS to evade paying taxes voluntarily. HMRC began issuing the letters earlier this month and is expected to continue this campaign for at least the coming year.

Two different versions of the letter will be used to determine the most effective approach moving forward. By offering businesses the chance to come forward and resolve their tax issues, HMRC aims to promote compliance and encourage transparency in financial reporting.

Table of Contents

New HMRC Powers Targeting Electronic Sales Suppression (ESS)

The government took decisive action against using Electronic Sales Suppression (ESS) tools by introducing new powers on 24 February 2022. ESS involves the manipulation of electronic sales data to underreport taxable sales. This article summarises the rules and potential issues surrounding these new powers.

The Rise of ESS Tools

Historically, HMRC considered businesses with large cash sales as high risk due to the potential for underreporting untraceable sales. However, the decline in cash transactions over the years has led to the rise of ESS tools. These tools can be physical devices, software, code, digital data or other tools that suppress “relevant electronic sales” records. For example, a till software might record only one out of every three sales, causing two-thirds of sales not to be accurately recorded.

HMRC’s Response to ESS and the Introduction of the ESS Bill

During the COVID-19 pandemic, HMRC discovered businesses using ESS tools to commit CJRS fraud by showing that their sales were negatively affected by the pandemic. In response, the government bypassed the standard consultation process and swiftly introduced the ESS Bill.

New Inspection Powers and Penalties

Although the legislation allows HMRC to charge end users of ESS tools with financial penalties, it is evident from the maximum penalties assessed that the focus is also on the distributors of these tools. Inspection powers have been extended to obtain documents and inspect premises to determine ESS penalties, understand the operation of an ESS tool, and identify individuals liable to an ESS penalty. Notably, the ESS legislation grants HMRC the power to change the maximum penalty assessable through a statutory instrument, indicating a long-term strategy in the government’s fight against economic crime.

Penalties for Makers, Suppliers, and Promoters

Makers, suppliers, and promoters of ESS tools can face a maximum penalty of £50,000. Even if a person is liable under multiple categories, such as making and supplying, the total penalties cannot exceed this amount. Liability arises for promoters on each occasion of promoting the use of an ESS tool, defined as communicating information about the tool to another person with a view to someone using it as an ESS tool. No penalty applies for supplying if the person can prove to HMRC that they were unaware they supplied an ESS tool; hence, an unaware promoter will not be held culpable.

Possession of ESS Tools and Penalties

Individuals possessing (including accessing) an ESS tool face a maximum initial penalty of £1,000, regardless of actual use. Daily penalties of up to £75 per day (capped at £50,000) apply for continued usage. No penalty will be charged if a person can prove to HMRC, within 30 days of receiving the penalty notice, that they never had, or no longer have, possession/access to the ESS tool. However, a person cannot use this defence if they have received a prior ESS penalty in the last five years. This strict stance means that those previously caught out must exercise extreme caution when purchasing future electronic sales equipment.

General Protections and Appeals

General protections exist, such as double jeopardy, where no penalty applies if a person has been convicted of a criminal offence. While not surprising, this serves as a reminder that HMRC may pursue criminal prosecution when identifying ESS in action. Individuals involved may wish to seek immunity from criminal prosecution by disclosing the CDF.

HMRC may reduce penalties in “special circumstances” and stay them, including under a compromise agreement where appropriate. “Special circumstances” specifically exclude the inability to pay but could cover other situations. This follows the treatment for penalties for incorrect returns.

A standard statutory right of appeal (to HMRC or the Tribunal) against a penalty (including the amount) is available, with the usual 30-day deadline applying.

Seeking Help and Regularising Affairs with HMRC

HMRC has already begun utilising its powers under this legislation, so there may be a limited time for correcting irregularities and taking advantage of more favourable penalties before HMRC contacts you. If you or someone you know has been using an ESS tool and would like to regularise their affairs with HMRC, it is crucial to act promptly.

For assistance, contact us today, and a member of our team will be in touch. All communications will be treated with the strictest confidence. Our experts can help you navigate the complexities of the new ESS legislation and ensure you remain compliant with HMRC’s requirements. Don’t hesitate to get in touch and start the process of addressing any issues related to electronic sales suppression.