A three year sentence

    Originally called the Managing Deliberate Defaulters programme when it was launched by HMRC on 22 February 2011, to monitor businesses punished with a deliberate penalty, the initiative was renamed as the scope widened and the range of defaulters included in the programme was extended.

    Now called the Managing Serious Defaulters (MSD) programme, HMRC’s strategy to tackle deliberately non-compliant behaviour sets out to deliver a reassuring message to the compliant majority that deliberate non-compliance is wrong and there is a policy in place to deter people from continuing to commit it.

    What is a serious defaulter?

    HMRC considers people as serious defaulters if they have:
     
    • been charged a penalty because of their deliberate behaviour;
    • been identified during a civil investigation of fraud as presenting a high risk;
    • been charged a civil evasion penalty for dishonesty;
    • been successfully prosecuted for a tax matter;
    • become insolvent to avoid a tax liability, where an Insolvency Practitioner has pursued a debt on behalf of HMRC; or
    • paid a security for VAT, Environment Taxes, PAYE or National Insurance contributions.

    How many have been identified?

    16,636 individuals and businesses were entered into the MSD programme between April 2011 and March 2017:
     

    Timeline

    Total number of cases

    April 2011 – March 2012

    744

    April 2012 – March 2013

    1,668

    April 2013 – March 2014

    2,327

    April 2014 – March 2015

    4,571

    April 2015 – March 2016

    3,583

    April 2016 – March 2017

    3,743

     
    After hitting a peak in 2014/15 with 4,571 admissions, the number has dropped back over the subsequent two years, which is surprising in some ways.

    In 2011/12 HMRC delivered £18.6bn from compliance activity. By 2016/17 the figure had increased to £28.9bn, yet the number of cases identified as serious defaulters has not followed a similar trajectory.

    No doubt one explanation is the difference in the mix of money collected, in that over recent years the compliance result has been bloated by money collected from Accelerated Payment Notices, which do not attract a deliberate penalty.

    Nevertheless with criminal prosecutions rising and the imminent arrival of the first exchange of information under the Common Reporting Standard, the total number of serious defaulters is surely bound to climb further in the years ahead.

    What does monitoring involve?

    There is no monetary limit for being monitored.

    However, if a deliberate penalty has been charged for evading tax in excess of £5,000, HMRC can ask for more information to be submitted with self-assessment tax returns, such as detailed accounts and balance sheets where not already provided.

    If a business has been found to be a serious defaulter and that business is either a partnership or a company, the individual partners and directors can find themselves and their own tax affairs under scrutiny.

    HMRC may also monitor any other businesses which a serious defaulter is or becomes involved with, such as any new ventures started under a different name.

    In the most serious cases HMRC adopts a policy of announced and unannounced visits to businesses to check their business records during a current accounting period.

    With particular regard for VAT, HMRC can:
     
    • adjust the VAT accounting periods;
    • withdraw the use of certain schemes such as Cash Accounting and the Flat Rate Scheme, if VAT is believed to be at risk; or
    • require the production of a VAT account.

    How long is the monitoring period?

    Tax entities remain in the MSD programme until they are fully compliant in meeting their tax obligations. The monitoring period can last for a minimum of two years and a maximum of five years but, on average, it takes three years to be released from the programme.

    Who does the monitoring?

    HMRC has a dedicated team to manage the MSD programme called the Serious Defaulters Management Unit (SDMU).

    There is no right of appeal against entry into the programme. Once selected, the SDMU will usually write to the business or individual involved and set out the monitoring terms.

    For further information regarding the MSD programme, please contact the author of this article, our Head of Technical Research Guy Smith at g.smith@abbeytax.co.uk.