What is VAT evasion

What is VAT

VAT is a charge made on any supply of goods or services made in the UK. These must constitute taxable supply and must be made by a taxable person in the course of business. Taxable supply is a supply which is not exempt. Taxable person is a person required to be registered for VAT purposes.

Requirement to be registered

A person is required to be registered for VAT purposes if the amount of his or her salary is higher than or exceeds £70,000 per year. Registration for other persons is voluntary the benefit is that they will be able to recover input tax as it can be set against output tax. If a person starts earning less after some time it is still possible to de-register from VAT payments.

Examples of VAT rates in some countries are: UK-20%, Spain-16% (18% from July 2010),Sweden 25%, Slovenia-20%, Slovakia 19%,Portugal-20%, Poland- 22%, Malta-18%, Holand-19%, Luxembourg- 15%, Latvia-21%, Lithuania- 21%, Latvia- 21%, Italy-20%, Hungary- 25%, Greece- 21%, Germany-19%, Finland-22% (23% from July 2010), Czech Republic-20%, Austria-20%, Belgium-21%, Cyprus-15%, Switzerland 7.6% (8% from 2011 to 2017). In the UK a person is required to be registered for VAT purposes if the amount of the turnover of your business is higher than or exceeds £83,000 per year. Generally registration for other persons is voluntary, the benefit is that they will be able to recover input tax as it can be set against output tax. Deregistration threshold is £81,000. Therefore if the turnover is less after some time, it is still possible to de-register from VAT payments.

Input tax

It is a tax paid by a particular person on the supply of the goods and services to that person.

Output tax

Is a tax charged by a business when it is supplying goods and services.

It is important to distinguish between different types of supply which can be standard rated, lower rated (domestic heating, power, loft installation etc), zero rated (books, public transport, food etc) or exempt (health services , education, insurance, finance etc).

If a business makes a supply which is exempt, it means it is not charging VAT however at the same time it is also not allowed to recover VAT spent on its inputs. Failure to pay VAT may result in civil penalties, interest and default surcharge under VATA provisions e.g. VAT evasion dishonest conduct, incorrect certificates in relation to zero-rating, misdeclaration, any repeated misdeclaration, breaches of record keeping requirements etc.

VATA and Value Added Tax Act 1994

What is tax evasion

It is necessary to make a distinction between tax avoidance which is legal and tax evasion which is criminal. Tax avoidance constitutes moving away to another state where lesser tax liabilities apply. Tax evasion must always be reported to SOCA (Serious Organised Crime Agency). It is not enough just to report this to HMRC. SOCA will then report this to HMRC. HMRC will then investigate the matter. Such a report will be received by the Serious Crime Office. VAT evasion needs to be reported to SOCA. Tax evasion namely means creating false accounts or returns, deliberate failure to submit tax return, intentional refusal to submit correct amounts or correct errors which you knew about, failure to obtain consent under TA 1985 (section 765).

What is VAT evasion

It is the most common type of VAT fraud. A person who is VAT registered fails to declare or make their VAT returns by suppressing sales or inflating purchases. Evasion means an intentional non-payment when it is due this includes reference to obtaining the payment of VAT, refund and repayment falsely claimed e.g. by way of input tax and output tax which was understated. Intentional evasion of VAT is an offence under section 72(1) of the Value Added Tax Act. Maximum penalty is level 5 or 6 months imprisonment however at Crown Court 7 years imprisonment and unlimited fine.

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For more information on:

  • Penalties in case of VAT and VAT credits
  • Liability for civil evasion penalty
  • Mitigation of Civil Evasion
  • Criminal VAT prosecution policy