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Electronic Sales Suppression (ESS) – New HMRC powers

In the October 2018 Budget, the UK government committed to take steps to discourage the use of ESS tools. ESS is the fabrication of electronic sales data to facilitate the understatement of taxable sales. Here, we summarise the rules and explore issues that might arise.
Policy intent and overview of powers

Policy intent and overview of powers

Historically, businesses taking large cash sales were deemed high risk by HMRC due to the scope for understating untraceable sales. But the decline of cash throughout the years has led to the proliferation of ESS tools. An ESS tool is any physical device, software, code, digital data or any other tool that can suppress “relevant electronic sales” records. An example might be a piece of till software that only ‘records’ one in every three sales. The business will receive payment for all three sales, but when the sales records are collated, two thirds of sales will not be accurately recorded.

During COVID-19, HMRC became aware of businesses using ESS tools to commit CJRS fraud by showing that sales had been negatively affected as a result of the pandemic. The government acted decisively to disincentivise the use of ESS tools. It skipped the standard consulting process and instead, legislated swiftly by introducing the ESS Bill.

While the legislation allows HMRC to charge the end users of the tools a financial penalty, it’s clear, given the respective maximum penalties HMRC can assess, that its focus will be on the distributors of the tools.

Inspection powers are provided by extending the scope of existing powers to obtain documents and inspect premises, for the purpose of determining ESS penalties, understanding the operation of an ESS tool and identifying any person who may be liable to an ESS penalty. Notably, the ESS Bill also gives HMRC the power to change the maximum penalty assessable using a statutory instrument. This suggests that this is a long-term weapon in the government’s fight against economic crime.

About the author

Mark Taylor

+44 (0)20 7710 3389
taylorm@buzzacott.co.uk

Policy intent and overview of powers

Historically, businesses taking large cash sales were deemed high risk by HMRC due to the scope for understating untraceable sales. But the decline of cash throughout the years has led to the proliferation of ESS tools. An ESS tool is any physical device, software, code, digital data or any other tool that can suppress “relevant electronic sales” records. An example might be a piece of till software that only ‘records’ one in every three sales. The business will receive payment for all three sales, but when the sales records are collated, two thirds of sales will not be accurately recorded.

During COVID-19, HMRC became aware of businesses using ESS tools to commit CJRS fraud by showing that sales had been negatively affected as a result of the pandemic. The government acted decisively to disincentivise the use of ESS tools. It skipped the standard consulting process and instead, legislated swiftly by introducing the ESS Bill.

While the legislation allows HMRC to charge the end users of the tools a financial penalty, it’s clear, given the respective maximum penalties HMRC can assess, that its focus will be on the distributors of the tools.

Inspection powers are provided by extending the scope of existing powers to obtain documents and inspect premises, for the purpose of determining ESS penalties, understanding the operation of an ESS tool and identifying any person who may be liable to an ESS penalty. Notably, the ESS Bill also gives HMRC the power to change the maximum penalty assessable using a statutory instrument. This suggests that this is a long-term weapon in the government’s fight against economic crime.

Makers, suppliers, and promoters

Makers, suppliers, and promoters 

A person who makes/modifies, supplies or promotes an ESS tool is liable to a maximum penalty of £50,000. The total penalties cannot exceed this even if a person is liable under multiple categories – for example, making and supplying.

For promoters, liability arises on each occasion of promoting the use of the ESS tool, which is 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 satisfies HMRC that they were unaware they supplied an ESS tool, therefore, a promoter who is unaware will not be culpable.

What about possession?

What about possession?

A person in possession of (including accessing) an ESS tool is liable to 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 satisfies HMRC, within 30 days of receiving the penalty notice, that they never had, or no longer have, possession/access to the ESS tool. It will be critical to understand how HMRC intend to consider these applications including the extent of evidence they expect to receive. A person will not be able to make this application if they have received a prior ESS penalty in the last five years. This is a harsh stance and will mean those caught out previously will need to be extremely diligent when purchasing future electronic sales equipment.

General protections

General protections 

Double jeopardy - no penalty will apply if a person has been convicted of a criminal offence. While this is hardly a surprising revelation, it serves as a timely reminder that HMRC may elect to pursue a criminal prosecution when it identifies ESS in action. Therefore, individuals involved may wish to consider seeking immunity from criminal prosecution by making a disclosure under the CDF.

HMRC may reduce penalties in “special circumstances” and stay them, including under a compromise agreement where appropriate. “Special circumstances” specifically exclude inability to pay but do not cover anything else. This follows the treatment for penalties for incorrect returns.

There is a standard statutory right of appeal (to HMRC or the tribunal) against a penalty (including amount). The usual 30-day deadline applies for this.

How can we help?
How can we help?

The new legislation is scheduled to be enacted in early 2022 so there is limited time to correct issues. If you or someone you know has been using an ESS tool, and would like to regularise their affairs with HMRC, please do not hesitate to get in touch.

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If you'd like us to give you a call, fill in your details below and we'll email to arrange a good time to speak to our Head of Tax investigations team, Mark Taylor. All communications are in the strictest confidence.

If you'd prefer to speak to our team directly, please call +44 (0)20 7710 3389.

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