Worried About Being Investigated for VAT Fraud? What You Need to Know

As a business, there is a lot of information which needs to be submitted to HMRC, all of which needs to be accurate. If you make any mistakes or deliberately provide wrong information, HMRC may launch an investigation.

Any kind of HMRC check can be worrying but the penalties for VAT fraud can be harsh. If you are notified that you are being investigated for VAT fraud, you should take it seriously from the start, even if you do not believe you are in the wrong.

Professional advice from your solicitor or accountant is essential when your business is under investigation for VAT fraud, and you should not delay seeking this. Below we have provided some of the essential facts relating to VAT fraud investigations and what you can expect.

What is VAT Fraud?

Many types of VAT fraud involve large-scale operations and vast sums of money, but that is not always the case. While big money scams hit the headlines, HMRC also investigates many low-level cases of VAT fraud which may be termed as “evasion”.

Make no mistake: evasion is still fraud. Using a different name will not make HMRC treat the matter lightly. The difference is that where professional involvement is suspected, there will always be a criminal prosecution. This does not mean you will not face a criminal investigation, but it is not an automatic consequence either.

Section 72 of the Value Added Tax Act defines the following as criminal offences:

• Fraud
• Fraudulent evasion of VAT
• False accounting
• False statements for VAT purposes
• Conduct amounting to an offence

HMRC may also bring charges for VAT fraud under the Fraud Act 2006.

Evasion could mean incorrect recording, charging or payment; it is a wide scope which has the potential to include many different types of offences. Common types of VAT evasion include not being registered for VAT, using an incorrect VAT number and asking for payments to be made out to different people and/or addresses.

HMRC may use the allegation of fraud and the threat of prosecution as a means of getting individuals to confess and agree to pay up. This why legal advice is imperative.

Types of VAT Fraud

As described above, there are many different potential types of VAT fraud. Some of the most common types include:

• Carousel Fraud. Highly organised, professional cross-border VAT fraud which involves VAT not being paid on goods imported but then charged to the customer. The VAT portion of the sale is not paid to HMRC.

• Missing Trader Fraud. This typically forms part of Carousel Fraud and refers to a trader disappearing while owing HMRC a substantial sum in VAT.

• Cash Fraud. This is typically distinct and separate from Carousel Fraud and involves cases where a trader deliberately does not charge their customer VAT and does not record it for VAT purposes. To facilitate this the trader accepts a cash payment, charging the customer less and enabling both parties to benefit from the fraud.

• Online Fraud. A more recently seen type of VAT fraud, this involves online sellers failing to pay the correct amount of VAT. There is a responsibility placed on digital marketplaces to ensure that all sellers have and display a valid VAT number on their selling profile at all times. If a marketplace fails to take action against an individual seller, HMRC can take action against the marketplace itself.

What Are the Potential Penalties for VAT Fraud?

Despite the impression some have of HMRC, they usually have a strong preference for civil penalties rather than pressing for a full criminal prosecution. This ties the matter up quickly and ensures that the business pays what they owe.

Civil penalties are not just a light tap on the wrist, however. HMRC have substantial powers when it comes to dealing with VAT fraud and the penalties may include:

• Imposing a hefty fine
• Publicly naming individuals who owe more than £25,000
• Deprivation or confiscation order
• Disqualifying and fining company directors personally (typically for failing to fully co-operate at the start of a HMRC investigation)

The amount of the penalty fine that can be imposed depends on the type of VAT fraud and the value.

In cases of VAT payments and VAT credits, in addition to the repayment a penalty of 100% of the value of the evasion can be charged.

Where there is refund and repayment VAT fraud, the penalty is calculated by adding the overstated input tax to the understated output tax.

If the company makes an unprompted and voluntary full disclosure to HMRC, the penalties may be reduced by up to 40%.

In the cases where the fraud is deemed to be of a criminal nature, there is no limit on the penalty that can be charged. The courts may also issue a custodial sentence of up to 10 years in jail. In deciding the criminal penalty for VAT fraud, the judge will consider the following factors:

• Previous convictions
• Your degree of involvement
• The level of harm (or intended harm)
• Attempts to dispose of or conceal evidence
• Whether the crimes were committed while on bail
• Admission of guilt
• Attempts to falsely implicate others
• Mental health

Notification of an Investigation

If you have concerns over the accuracy of your VAT returns, you may be concerned about HMRC launching an investigation.

You will be notified by HMRC if they decide to commence a VAT investigation. This will be one of two forms: an aspect or full investigation.

As aspect investigation is where HMRC only want to check one particular area of your business. However, should they uncover more widespread concerns this may expand into a full investigation.

A full HMRC investigation enables every aspect of your record-keeping to be inspected by HMRC.

HMRC will write to you if they are launching a VAT investigation, but they may have already carried out some preliminary enquiries. Unless your business has been chosen at random because you are a high-risk industry, your VAT returns may have raised concerns which have triggered the response.