VAT Fraud: What You Need to Know About VAT Inspections and Investigations
Facing a HMRC investigation or allegations of VAT fraud is daunting. It is important to understand your rights and seek timely legal support to effectively navigate the process and achieve the best possible outcome.
Here, we will answer frequently asked questions about VAT fraud and VAT investigations, offering insights into a business’s rights and the steps to take if contacted by HMRC. We will also briefly outline the appeals process for challenging the outcome of a VAT investigation or pursuing Alternative Dispute Resolution (ADR) with HMRC.
Value Added Tax
VAT (Value Added Tax) is a crucial part of the tax system, generating revenue that supports the funding of public services. According to the March 2024 forecast by the Office of Budget Responsibility, taxes on consumer spending represents the second largest source of government revenue, with VAT making up the biggest portion. It is easy to understand why VAT fraud poses a serious challenge to the government, especially as it threatens to deprive it of vital funding.
However, a VAT inspection by HMRC does not necessarily indicate that a business is intentionally engaging in VAT evasion, avoidance, or the 'offence of fraud.' The criminal courts have held that to be found guilty of such an offence, a person “must be knowingly concerned in any fraudulent activity." Turning a wilful blind eye can in circumstances be construed as knowledge but mere recklessness is insufficient to support a guilty verdict in a criminal proceeding.
As can be seen from the above intricacies, a thorough understanding of the law is crucial when dealing with a VAT investigation.
VAT Fraud Explained
VAT Fraud is covered under Section 72 of the Value Added Tax Act 1994, where it defines the offence as:
‘If any person is knowingly concerned in, or in the taking of steps with a view to, the fraudulent evasion of VAT by him or any other person,’
A VAT registered business is required to charge the correct rate of VAT on its goods or services, submit accurate VAT Returns, pay VAT to HMRC and maintain accurate records. Failing to perform these responsibilities can lead to serious consequences.
VAT fraud can take several forms from the abuse of VAT registration and VAT Reverse Charge to schemes like missing trader intra-community (MTIC) fraud, also known as carousel fraud, amongst others.
What is deliberate VAT Fraud?
VAT fraud occurs when businesses evade VAT payments or claim refunds dishonestly. This can involve falsifying invoices, failing to declare sales, or participating in schemes such as MTIC or carousel fraud, which exploit the VAT system.
What is a VAT investigation?
A VAT inspection or compliance check is where VAT officers inspect business records to ensure they are paying or reclaiming the correct amount of VAT. Typically, a VAT investigation happens when HMRC suspect something is wrong, either they have found errors or it has been triggered by a HMRC risk assessment.
What can trigger a VAT investigation
VAT investigations are usually triggered with discrepancies in the information a business has submitted to what HMRC has on its system. Other reasons include, but not exclusive to:
- Previous history of late or non-payment of VAT
- Inconsistent VAT reports
- Businesses operating in HMRC’s designated high risk sectors
- Failed credibility check
How far back can a HMRC tax investigation go?
There are several time limits within which HMRC issue Tax Assessments, typically four years from the end of the relevant tax period. However, if HMRC suspect deliberate underpayment or claiming of VAT which they are not entitled, it can go back as far as twenty years.
How will I know if I am being investigated by HMRC?
HMRC will contact your business, usually via a letter to arrange a visit, usually giving up to seven days’ notice of their proposed visit. The letter will state what information they want to see and how long the inspection should take as well as other details.
HMRC can also call or visit your business without an appointment.
What should I do if I am being investigated by HMRC?
Receiving a letter from HMRC or facing an investigation can be frightening but obtaining prompt legal advice is essential. VAT inspections may vary from routine compliance checks for potential errors to in-depth investigations into suspected VAT fraud.
If HMRC has contacted you, refrain from responding without understanding the implications, as mistakes can escalate the situation. Our skilled tax solicitors are here to guide you, protect your rights, and help you navigate the VAT investigation process with efficiency and confidence.
After HMRC’s visit
In most cases, after officers have visited, HMRC will send you a letter. This letter will either state that no further action is needed or confirm:
- instructions to improve your VAT record keeping
- any corrections you must make to your VAT account
- if you are overpaying or underpaying your VAT
- formal service of a VAT Assessment and any penalties
What happens if I disagree with the outcome of a VAT investigation?
You have the right to challenge VAT Assessments and penalties or decisions made by HMRC. We strongly recommend seeking legal support to deal with HMRC on your behalf. The decision letter from HMRC provides an opportunity for a review, giving you thirty days from the date of the offer to either accept the review or appeal directly to the Tax Tribunal.
Who bears responsibility if my business unknowingly becomes involved in a VAT fraud scheme?
Businesses can be liable if they fail to exercise due diligence in identifying fraud risks within their supply chain. This can lead to HMRC issuing a Kittel Assessment for VAT.
Why should I seek legal advice?
You can deal with HMRC directly if you feel confident managing the HMRC Fraud Investigation Service (FIS), handling disclosures, and addressing inaccuracies in your VAT submissions.
However, it will be beneficial to retain an experienced firm that specialises in challenging tax assessments and liaising with HMRC, who will ensure the investigation complies with the appropriate regulations and has the skill to negotiate favourable settlements. Legal support can also help expedite the process and work towards the best possible outcome.
The sanctions for VAT fraud are varied and can include heavy fines, freezing of assets, imprisonment of up to seven years and reputational damage. So very few businesses take the risk of not seeking early legal advice.
What can we assist you with?
At KANGS, our team has a long history of successfully representing clients in complex VAT investigations. We act for taxpayers in the full array of HMRC investigations including:
- Tax Avoidance Schemes for both participants and promoters
With over twenty-five years of experience in both strategic negotiations and litigation with HMRC, we have the knowledge and experience to protect our client’s interests. Please feel free to contact our team using the details below as they will be delighted to hear from you.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.
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