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.
It is a tax paid by a particular person on the supply of the goods and services to that person.
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.
VAT evasion can be investigated under civil evasion regime or under criminal prosecution. VAT evasion which involved professionals will be investigated under criminal fraud. Civil investigation for VAT evasions will be carried out at VAT evasions by cash based businesses which are the main offenders in this area. Civil investigation of fraud procedure is less serious and it is for more serious offenders to be prosecuted under the criminal one. For the purposes of Article 6 of the European Convention of the Human rights both civil evasion penalty is equivalent to criminal one. A person can be charged under a separate charge which is an offence of fraudulent evasion of value added tax.
Penalties in case of VAT and VAT credits
In relation to VAT and VAT credits the prescribed penalty is 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. There are no prescribed penalties for other cases.
Liability for civil evasion penalty
In order to prove liability for civil evasion penalty it is necessary to prove that a person had done or had omitted to do an act which helped evade VAT an such a conduct was dishonest. A person includes corporation. In case of partnerships VAT evasion of one partner binds the whole partnership, the position is generally different with LLPs where liability is imposed on the LLP rather than on one member only.
Mitigation of Civil Evasion
Penalty mitigation may apply (reduction up to 40%) if you are able to give early and honest explanation as to why there was a failure to declare the payments and the full statement of the amount. Reduction is also possible if you follow all necessary procedures and communicate with your investigators. However the penalty can also be exaggerated if it can be shown that a director’s conduct contributed to the company’s liability for civil evasion penalty.
In order to strengthen the measures relating to VAT evasion on imports, the Council of the European Union adopted new Directive. The aim was to impose greater controls over the current system so that tax evasions can be avoided. The importation of the goods is exempt from VAT liability if these goods are immediately transferred to another person in another member state, conditions in relation to fulfilling procedural requirements still apply. E.g. informing competent authorities about VAT Identification number of the importer and the customer etc.
Criminal VAT prosecution policy
This will apply if there is one or more businesses involved in evasion, if there is an intention to deceive during civil investigations, if the offence is done by professionals, lawyers, accountants etc, where evasion is done together with other activities under investigation, there has been a previous offence involving VAT and if there is no limit on tax evaded in order for criminal investigation to take place.