Lessons from HMRC’s Skelwith Leisure tax fraud investigation

Skelwith Leisure is back in the news. Almost a decade ago, the company made headlines for its plans for the £100 million Flaxby golf resort in North Yorkshire.

However, in 2015, following fierce legal battles over the development, it went into liquidation – and, by 2016, Skelwith Leisure owed more than £70 million in debts, including £51.5 million to HMRC.

Around the same time, HMRC launched an investigation into potential fraud. It has gone through several legal twists and turns, with the Upper Tribunal having released its most recent decision in September.

Here, we delve into the case and share lessons for accountants and finance teams.

The facts of the matter

In May 2014, HMRC, when verifying Skelwith Leisure’s VAT return, discovered what appeared to be concerning inaccuracies.

On 23 July 2014, an HMRC officer visited Skelwith Group, seeking further documentation, only to be told that all the company’s business records had been destroyed.

HMRC went on to allege that Skelwith had been making false claims on a large scale and launched a Code of Practice 9 (COP 9) investigation. This is a civil investigation conducted by HMRC when there’s a suspicion of fraud.

Between 2016 and 2020, Paul Ellis, Skelwith’s director at the time of the allegations, provided various paperwork in response to HMRC’s requests.

However, Ellis did not hand over a hard drive which HMRC believed to contain a significant amount of digital correspondence concerning Skelwith. This led HMRC to conclude that Ellis had cherry-picked the information he shared.

Getting the Tribunals involved

On 2 June 2020, HMRC applied to the First-tier Tribunal for a disclosure direction to compel Ellis to hand over:

• Documents concerning Skelwith’s day-to-day operations, management, financial and tax affairs
• Documents concerning the personal affairs of Darren Broadbent, who was Ellis’s business associate
• Correspondence between Ellis, Broadbent, and Craggs and Co, a company that represented the duo in the COP 9 investigation

Ellis appealed.

On 21 September 2022, the Upper Tribunal announced the outcome of the appeal. It found that Ellis should release the documents, but that those released should be limited to the time frame covered by the subject matter of the appeal.

Lessons for accountants and finance teams

The outcome of HMRC’s investigation into Skelwith is yet to be released. However, it’s not too early for accountants and finance teams to learn from the allegations and investigation.

Be alert to questionable conduct by directors

In an ideal world, all directors are squeaky clean.

But recent revelations about bounce back loans – particularly that nearly £1.7 billion worth of loans showed signs of fraud – are evidence enough that accounting professionals must do their due diligence.

While accountants can’t control their directors, they should be alert. Red flags that could indicate a director is attempting tax evasion include:

• Accounts with records of inexplicable expenses 
• Purchase agreements that lack an obvious purpose related to the business
• Payments of sizeable fees for consulting or services to related parties 
• An absence of updates on research and development
• Frequent calls for funds without clear reasons

Be thorough in risk assessment

According to HMRC, preventing tax evasion begins with risk assessment. After all, it’s only by determining the nature and extent of risks that accountants can mitigate them.

Yet, only 24 per cent of businesses in the UK have undertaken assessments to assess whether they are at risk of failing to prevent tax evasion.

The way in which risk assessment is conducted varies from company to company, depending on size and industry.

However, accountants and finance teams can take the lead in ensuring their businesses are aware of the most common risks, which include:

• Opportunities, such as projects worth a lot of money or involving many moving parts 
• Relationships with third parties, particularly those in areas where regulation is less strict
• Transactions that are secretive or complex

Further, risk assessment should be well-resourced, well-documented and reviewed frequently. Senior management should take responsibility for oversight, and employees should have opportunities to identify and report on emerging risks.

Conduct due diligence with third parties

It’s one thing to monitor red flags in your own company – and quite another to spot them in third-party suppliers.

That said, due diligence can go a long way. This should include developing processes that allow you to check that third parties are up to date with their tax obligations, as well as applying the OECD’s Common Reporting Standards.

In addition, where appropriate, ensure that your due diligence extends beyond the UK’s borders to suppliers in other nations.

Train staff regularly

While accountants and finance teams can be alert to fraudulent directors and take the lead on risk assessment, they can’t be everywhere at once.

It’s important that all staff are trained regularly on the rules governing tax evasion, their responsibilities when it comes to compliance, how to ensure due diligence and what to do if they spot red flags.

Accountants might join forces with legal teams to prepare, deliver and review such training.

Report, report, report

All businesses should provide employees with channels for reporting. These may include meetings with dedicated staff, online portals and whistleblowing hotlines.

It’s vital to create an environment where staff can report suspicion comfortably, confidently and without fear of reprise.