Over 30 countries have created and implemented so-called 'Fiscal Till Systems' to crack down on tax fraud by Electronic Suppression of Sales (ESS), but the UK shows no sign of following suit. Is the slow-burning rollout of Making Tax Digital into a direct tax to blame?

Electronic till

Electronic Suppression of Sales (ESS) is probably not being adequately detected or reported in the UK, as in many other countries. Statistics for this type of fraud are thin on the ground for Britain, however, figures cited for other countries suggest that back in 2018 ESS was estimated to be present in 34% (of Canadian), 50% (of German – two studies), and 70% (of Swedish and Slovenian) businesses.

What is ESS and how is it perpetrated? 

ESS is all about suppressing sales data electronically. Suppressing sales in its simplest form means not recording certain trades or recording a sale as something else with a lower tax rate.

When it is done electronically it could, for example, make a point of sale device (a till) to record the press of a key for a product sale, let's say, a bottle of wine (standard rated for VAT), but then to report it internally as something else with a lower VAT rate, say as a sale of a bottle of water whilst generating a receipt for the customer for the full sale of the bottle of wine. When a payment is received this is then diverted to an undeclared bank account or received in cash and the sales value of the genuine transaction is not declared to the taxing authority.

Software designed for ESS can be running hidden in a system or activated to run at specific times with the degree of sophistication dependent on the programming ability of its creators. According to findings in a batch of the original US prosecutions, Electronic Point Of Sale (EPOS) agents were found to be running a side-line selling ESS as an add-on software service to their clients.

The software that creates this form of sales manipulation are known as Zappers and Phantomware in the US. It appears that the term 'Zapper' was coined after prosecutors found it written on a disc used to activate an ESS process in a case litigated in Canada. Zappers can be activated by the use of a drive or hidden in a system, hence the term 'Phantomware.'

'Anti-Zapperware' legislation has now sprung up in many US states. The Anti-zapper legislation in Washington DC has some useful definitions:

  • 'Automated sales suppression device' or 'zapper' refers to a software program carried on a memory stick or removable compact disc, accessed through an Internet link or accessed through any other means, that falsifies the electronic records of electronic cash registers and other point-of-sale systems, including, but not limited to, transaction data and transaction reports.
  • 'Electronic cash register' means a device that keeps a register or supporting documents through an electronic device or computer system designed to record transaction data for computing, compiling, or processing retail sales transaction data in whatever manner.
  • 'Phantom-ware' means a hidden, preinstalled or installed at a later time, programming option embedded in the operating system of an electronic cash register or hardwired into the electronic cash register that can be used to create a virtual second till or may eliminate or manipulate transaction records that may or may not be preserved in digital formats to represent the true or manipulated record of transactions in the electronic cash register.

The OECD’s Task Force on Tax Crimes and Other Crimes (TFTC) was behind the US and Canada and its report 'ESS a threat to tax revenues' was published in 2013 with an aim 'to spread awareness of this phenomenon'. It said back then that 'a number of countries (including France, Ireland, Norway and the United Kingdom) have tested their retail sector and found significant problems'.

The OECD noted, "Fiscal tills were introduced by legislation in a number of countries more than twenty-five years ago and there has been a recent increase of interest in their use. Essentially, they are cash registers that are required to conform to a set of specified technical requirements to secure data storage and monitor events within the system. They were first introduced in Italy back in 1983, when the Government created the obligation for certain businesses to issue a fiscal receipt by means of a fiscal electronic cash register in an attempt to reduce the size of the shadow or underground economy".

The OECD noted in 2013 that countries including, Argentina, Brazil, Bulgaria, Greece, Hungary, Italy, Latvia, Lithuania, Malta, Poland, Russia, Turkey and Venezuela have all introduced 'Fiscal till solutions. Subsequently, a vast number of countries adopted their own variations.

The topic of ESS receives sporadic publicity in the UK:

  • In 2019 HMRC ran a Call for evidence on ESS and concluded "The government is using this evidence base to explore the issue further and develop more effective policy options for tackling ESS, in conjunction with other measures to tackle non-compliant activity."
  • Finance Act 2022 created legislation giving HMRC new powers to tackle ESS, including the issue of Penalties of us to £50k per tool for the use of ESS tools,
  • HMRC has run campaigns on 'Make a disclosure about misusing your till system'.
  • In June 2024, HMRC created a campaign, issuing One-to-Many letters on this topic.

Detection and prevention

For most people, ESS is obviously tax fraud and a little-known activity. By its electronic nature, it's highly specialised and difficult to identify without detection software and therefore even if a business has apparently comprehensive systems and checks in place it is difficult to identify it. Advisers of large businesses may consider how they might take heed of the Economic Crime and Corporate Transparency Act 2023 (ECCTA)'s introduction of a new 'failure to prevent' regime.

HMRC has an opportunity via Making Tax Digital for VAT to require a 'Fiscal till solution'. Perhaps the intent is there but thus far the issue seems to be that if electronic sales recording were to become mandatory, HMRC or the relevant tax adviser (a new class of tax auditor?) will need to harness ESS detection software.

Useful guides on this topic

Making Tax Digital Zone
All about the making tax digital by default program for VAT and Income Tax

Penalties: Use of ESS tools
What penalties apply for till tampering or deliberate Electronic Sales Suppression (ESS)?

HMRC June 2024 Campaign
Continuing their current campaign of one-to-many letters, HMRC have begun issuing another, this time concerned with Electronic Sales Suppression (ESS).

HMRC Consultation:  summary of responses: ESS call for evidence
This follows its 2019 consultation on Electronic Sales Suppression (ESS). ESS is a growing problem and it occurs when businesses manipulate electronic sales records, either during or after the point of sale, to hide or reduce the value of individual transactions.

External links

Richard Thompson Ainsworth: Zappers, Phantomware and Other Sales Suppression Software in the State of Washington

OECD: Electronic Sales Suppression: a threat to tax revenues