Her Majesty’s Revenue and Customs (HMRC) is proposing a new penalty as part of its measures to tackle VAT fraud. If brought in, company officials could see themselves liable for the penalty.
This form of collecting penalties is increasingly popular with HMRC; the new penalty is suggested in a recent HMRC consultation entitled Penalty for participating in VAT fraud.
The discussion document, which is due to close on 11th November 2016, outlines the new penalty as well as considering a range of options for tackling those who knew or who should have known that transactions they carried out were connected with fraud.
VAT fraud, which can be costly to the public purse, commonly involves supply chains in which those involved attempt to distance themselves from the supplies and parties in the chain. Those participating usually realise the proceeds by claiming a VAT repayment further down the chain.
Case law prevents businesses from reclaiming VAT if they know or it is deemed they should have known that their transactions are associated with VAT fraud. This is commonly referred to as the ‘knowledge principle’. However, for HMRC to apply this principle it must have evidence that the business knew fraud involved.
The current civil penalties regime determines what the penalty is, and requires HMRC to decide whether a business’s non-compliance was ‘careless’ or deliberate’, with the former indicating HMRC believes the taxpayer should have known they were connected with fraud, and the latter that the taxpayer had knowledge of their wrongdoing.
At present, HMRC has to wait until after the VAT case before it can issue a penalty, but this presents the opportunity for a second round of legal proceedings, such as an appeal, which is costly, and allows those involved in fraud time to disperse money that would be used to pay the penalty.