The aftermath of fraud: navigating potential tax implications
Experiencing fraud can be a costly activity for an organisation, not just because of the financial implications of the fraud, but also the costs of investigating and remediating the issue itself. One aspect that is often overlooked are the tax implications of a fraudulent event, which require careful consideration as the organisation navigates through the aftermath of such a situation.
One immediate concern for a ‘defrauded’ company is the impact on its financial statements. In some cases, losses resulting from fraud are recognised as ‘expenses’, which in turn artificially reduce the organisation’s taxable profit, meaning that insufficient tax has been paid. However, the tax treatment of fraud losses can vary based on jurisdiction, the nature of the fraud and whether we are considering corporation tax or VAT. In some cases, tax authorities may allow the defrauded company to claim a deduction for the losses incurred due to fraud. This deduction can provide some relief by lowering the taxable income and, consequently, the tax liability. The process of claiming such deductions can be a tricky process, which is why investigating, documenting, and evidencing the fraud is crucial.
Another aspect to consider are instances where tax authorities might challenge the deductibility of fraud losses, particularly if they deem the organisation’s internal controls or risk management practices to be inadequate. This emphasises the importance of being proactive in your approach to countering potential fraud that can legitimise losses claimed etc. Therefore, organisations may consider collaborating with tax professionals, counter fraud specialists, and potentially legal advisors, to navigate the complexities and best prepare defences. Some jurisdictions may require companies to account for losses in the fiscal period they occurred, while others might allow for adjustments in current or subsequent periods. Understanding the rules in different jurisdictions is vital for accurate financial reporting and tax compliance.
Post-investigation: the recovery of stolen funds or assets can introduce another layer of tax considerations. While the amount can vary depending on the case, the recovered monies may be subject to taxation in a later accounting period, particularly when reliefs have been claimed in earlier periods, and the organisation should carefully evaluate the potential future tax implications of funds/assets recovered. In many cases, the amount suspected to have been lost to fraud is far less than the true extent. As such, it is essential that any affected organisation employs counter fraud specialists to establish the quantum of the fraud. In the aftermath of a fraud, organisations may also decide to invest in strengthening their internal controls and procedures, and to implement anti-fraud measures. These costs could potentially qualify for tax relief, being incurred wholly and exclusively for the purpose of proper corporate governance and risk management.
In conclusion, experiencing a fraudulent event can be costly, complicated, and stressful. Collaborating with tax experts and counter fraud specialists can ensure the investigation - and the aftermath - is thorough, accurate and cost-effective.
How Tax Resolutions can help?
When it becomes clear that tax has been underpaid (or overpaid) because of a fraud perpetrated, our team can advise on the most appropriate disclosure route, if appropriate, and act as your representative in investigating potential tax consequences and dealing with HMRC.
For more information on our tax resolution services, please contact Hayley Ives or your usual Crowe contact.
How Forensic Services can help?
We have a team of counter fraud specialists who can advise on building resilience to fraud, investigate cases, and provide post-incident support. If you would like more information on our forensics services and how we can support your organisation through the process, please contact Daniel Sibthorpe, or your usual Crowe contact.
