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Claiming tax relief on small employment-related expenses is ruled a money laundering risk

Monday, 3 June, 2019

A company that helps employees claim small amounts of tax relief on their employment-related expenses has been designated by the Upper Tax Tribunal as a 'tax advisor' for the purposes of the Money Laundering Regulations 2007 (MLR 2007).

The firm, Online Tax Rebate, contacts people who may be entitled to unclaimed tax relief for their minor employment expenses, such as cleaning of their uniforms. Those who accept can fill in a web form enabling the company to prepare a claim for a tax rebate or tax code adjustment. The customer can then file this claim with HMRC, and if they get the tax refund, they pay a fee to Online Tax Rebate.

HMRC decided that Online Tax Rebate's business model makes it a tax advisor for money laundering purposes, and that it had failed to verify its customers' identity under due-diligence. It imposed a penalty of GBP14,641, even though it accepted there was a low risk of money laundering or terrorist financing.

Last year, the company appealed to the First-tier Tax Tribunal on the grounds that it was not subject to the regulations because its real customer was HMRC itself, and so it should not be penalised at all: although in 2011 it had registered itself for the purposes of MLR 2007 on a precautionary basis.

However, the tribunal disagreed. It decided that the company was indeed liable for a penalty, but it reduced the amount to GBP2,500 because of the low risk. It considered that Mr Mills, Online Tax Rebate's director, a chartered accountant, should not have held the belief that it was not regulated under MLR.

Mills appealed again. He maintained that the EU directive on which MLR 2007 was based was explicitly not aimed at low-risk businesses. He also asserted that his company had no business relationship with employees until HMRC had actually agreed that a refund was due, so that customer due-diligence was not necessary until that point. He also reaffirmed his view that his real customer was HMRC, in that he was merely using its own published information and guidance in order to ensure the tax rules were applied correctly. Tax calculation websites like Moneysavingexpert.com do exactly the same, he pointed out.

The Upper Tax Tribunal agreed with many of Mills' arguments, in particular that the regulations were enacted because of 'a concern within the EU of massive flows of dirty money', and that the EU directive emphasises that simplified due-diligence is appropriate in cases of low risk.

However, it accepted HMRC's argument that the question whether a person is subject to the provisions of the directive or the regulations is not answered by reference to the degree of risk that its business is considered to represent, but by the nature of the business itself. And that, the tribunal concluded, was within scope of the regulations, because it was acting as a tax advisor.

Ultimately, the Upper Tribunal found against Mills, although it was careful not to speculate on how the regulations might or might not apply to Moneysavingexpert.com, or anyone else who was not party to his appeal. It accordingly confirmed the reduced penalty of GBP2,500 imposed by the First-tier Tax Tribunal (Online Tax Rebate Ltd v HMRC, 2019 UKUT 0167 TCC).

However, it also opened the door to another ground of appeal for Mr Mills, if he is so inclined. HMRC had relied on the company’s establishment of a business relationship with its customers as the trigger for application of MLR 2007 Regulation 7, and in the case of Online Tax Rebate, that relationship may have been so short-lived as not to justify a due-diligence check, it noted.

'Given the acknowledged very low risk of money laundering or terrorism finance in the company’s business model, the requirement for enhanced customer due-diligence is a little surprising', it said. 'We feel there may have been grounds ... for concluding that [the company] was not obliged by Regulation 7 to apply customer due-diligence measures, and so no penalty could be charged by reference to a failure to apply those measures.'

Sources