VAT evasion

A VAT evasion accusation can have devastating consequences not only for the business but also for the Directors or Partners of the business as appropriate.

What is VAT fraud?

VAT fraud is the simplest and most prevalent form of tax fraud uncovered by HMRC. Here, VAT registered businesses, or even businesses incorrectly not having applied for VAT registration, are accused by HMRC of failing to declare their actual or true liability on VAT returns by suppressing sales or over stating purchases, and sometimes both. Cash-based businesses such as restaurants, pubs, taxi firms, and launderettes are the main suspects targeted by HMRC. Also quite susceptible to an accusation of VAT evasion are business in the construction sector or suppliers of staff.

HMRC Penalties for VAT evasion

HMRC usually deal with cases of VAT evasion under the civil evasion penalty regime. In relation to VAT and VAT credits, the prescribed penalty is up to 100% of the amount evaded and with respect to refunds and repayments it is the aggregate of the amount of input tax which was overstated and output tax which was understated. Penalty mitigation may apply (in terms of a reduction up to 40%) if a business is able to self-report and provide an early and honest explanation.

Is it deliberate

This is where a business knew that a VAT return or a document was inaccurate when it was sent to HMRC. Examples of deliberate VAT inaccuracies include deliberately:

overstating a businesses expenses;
understating a businesses income;
applying an incorrect VAT liability.

Deliberate and concealed inaccuracies are where a business knew that a VAT return or document was inaccurate and you took active steps to hide the inaccuracy from HMRC, either before or after it had sent the VAT return to HMRC. An example of taking active steps to conceal an inaccuracy is where a business creates a false invoice to cover a non-existent stock purchase.

Is it Criminal?

Sometimes VAT evasion fraud is subject to criminal prosecution and on those occasions then HMRC will seek to commence proceedings in the criminal courts. Intentional evasion of VAT is an offence under section 72(1) of the Value Added Tax Act 1994. The maximum penalty at the Crown Court is 7 years imprisonment and unlimited fine.

Other possible outcomes as a result of the fraudulent evasion of VAT

A company officer may have to pay some or all of a company’s penalty for a deliberate inaccuracy.

A company officer may have to pay some or all of the company’s penalty if the penalty is due to their actions, and one or more of the following applies:

they have gained, or attempted to gain, personally from a deliberate inaccuracy
the company is, or HMRC believe it’s, about to become insolvent – even if the officer did not gain personally from the deliberate inaccuracy

Note that a VAT evasion penalty can be sought by HMRC even if there was only an attempted gain.

If the company pays the penalty, HMRC not ask the individual officers to pay.

A company officer is a director, shadow director, company secretary or manager of a company, or a member of a limited liability partnership.

Even if VAT evasion is accepted or proved it may be possible to have a penalty reduced.

Example

HMRC had alleged that the company was involved with “fraudulent activity” in relation to a number of cars that had been “exported” to the Republic of Ireland. HMRC sought to argue that the penalty was the personal liability of a Director as HMRC had formed the view that the company Director had “personally gained, or attempted to gain,” from the alleged VAT evasion. VAT advice from one of our team of VAT specialists successfully defend our client against this accusation of VAT evasion.

Knew or should have known

Transactions connected with VAT evasion typically involve complex supply chains designed to exploit the VAT system. In some circumstances HMRC can deny the recovery of VAT if it can prove on the balance of probabilities that the business knew or should have known about it’s connection with VAT fraud. In such circumstances HMRC can rely on the decision at the European Court of Justice (ECJ) in the case of of Axel Kittel.

Following a further ECJ decision in the case of Ablessio which allows tax HMRC, to resort to VAT registration cancellation or refuse a VAT registration application if there is objective evidence that the registration is being used, or is likely to be used, for fraudulent purposes.

The Mecsek judgement only provides specific authority to challenge cases in which fraud has been committed by the customer.

Contact

If VAT evasion is suspected we recommend speaking to one of the VAT specialists here at Solve VAT on 0161 883 2120 as soon as possible.

HMRC information

HMRC briefing on tax evasion.