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Small business owners are being warned not to be fooled by a fake GDPR tax credit scheme.

A number of firms are offering a service that checks a business’s risk of a fine for GDPR (General Data Protection Regulations) breaches. The firms then promise tax cuts on reserves put aside to cover possible fines for GDPR failures.

According to a report in Computer Weekly, scheme promoters are increasingly targeting IT companies. These promoters are playing on the fears of small businesses who worry about GDPR compliance.

But the promoters are offering a fake tax scheme. In fact, it is effectively fraudulent.

What is GDPR?

GDPR came into force under the Data Protection Act 2018. It controls how personal information is used by organisations, businesses or the government.

The regulation means businesses that do not process an individual’s data in the correct way can be fined. Most small businesses only hold the data from their clients and/or potential clients and GDPR shouldn’t be a problem for them.

But large organisations that handle a lot of personal data may require a data protection officer. Google is one of those large companies that fell foul of European GDPR rules and were fined £43 million.

Despite a lot of concern before GDPR came into force, data protection regulators haven’t imposed the large fines that many feared would happen.

What is the fake GDPR tax credit scheme?

Reports from the website for accountants, AccountingWeb, say that companies claiming to be ‘GDPR experts’ produce a report for the company. This details the level of financial penalties a business might face for not being GDPR compliant.

They then use the figure as an estimate for possible GDPR penalty costs in the company’s accounts and call this a ‘GDPR tax credit’. But no such tax relief is available.

The company suggests adjusting the business’s accounts for the previous year (or sometimes more) to include the provision of a possible penalty. This sum then reduces taxable profits. The promoter of the fake tax scheme takes a fee for the advice, usually 30% of the tax repayment plus VAT.

Why is it fake?

Whilst there are instances when you can make a provision for some future costs to reduce tax liabilities, the GDPR ‘tax credit scheme’ is a con.

There are numerous reasons that the provision fails, including:

  • The fee hasn’t arisen due to a past event.
  • It is not ‘more likely than not’ that the business will need to pay a penalty or civil claim for a breach of GDPR law.
  • The claim cannot be reliably estimated in line with the guidance in HMRC’s guidelines.

For example, let’s say your business messes up a contract with a client. If you expect that they may sue you for £10,000, you can make a reserve of £10,000 in your accounts this year. That is legitimate and prudent accounting. As you anticipate a loss, you can get a reduction in your tax bill.

But you won’t know in advance if you are likely to be given a penalty for breaching GDPR rules. In fact, as we’ve seen above, imposing fines for GDPR breaches are few and far between, and any breach is amicably worked out.

Also, fines are not tax-deductible; so if you were fined you can’t make that adjustment in your accounts.

What to do if I’m contacted

If you are contacted by a company that claims you may face a GDPR penalty stop and take stock. There are legitimate companies that might be experts in GDPR and they may be able to help. But if they’re offering to reduce your tax liability then don’t go any further.

Speak to your accountant before making any decisions on tax, especially if you are contacted by a company that isn’t acting as your tax agent.

Names tax avoidance schemes

There are a number of tax avoidance schemes that HMRC has warned against. It now names these schemes to help protect you from unscrupulous promoters.

If you want to check out the schemes, click on this link.

For more details about tax planning, we’ll be writing a blog on that soon. In the meantime, contact us for more details if you’re concerned about tax advice.