VAT evasion is serious form of tax fraud and is treated seriously both by the courts and HMRC. It may result in civil penalties, interest and default surcharges under VAT legislation, as well as potential criminal charges.
What is VAT?
VAT is a tax charged on the supply of goods and services by UK businesses. The goods or services must constitute taxable supplies and must be made by a taxable person in the course of business. A taxable supply is a supply which is not exempt, and a taxable person is a person or business required to be registered for VAT purposes.
Requirement to be registered
A person or business organisation is required to be registered for VAT purposes if the amount of their taxable supplies exceeds £85,000 per year. If your taxable supplies are less than £85,000, you can voluntarily register for VAT.
This is the VAT paid by the buyer on the supply of the goods and services to the supplier. It is the element added to the net price of goods and supplies that are subject to VAT.
This is the VATadded by a person or business when it supplies goods and services and they are registered for VAT.
It is important to distinguish between different types of supply which can be standard rated at 20%, lower rated at 5% (eg. domestic heating, power, loft installation etc), eg. zero rated (books, public transport, food,) or exempt (eg. health services, education, insurance, finance).
What are tax evasion and tax avoidance?
Tax avoidance is the use of tax and other laws to reduce your tax burden and is not illegal. Tax evasion, on the other hand, is the illegal evasion of taxes by individuals and businesses. Tax evasion can take many different forms, and it now seems to include extensive exploitation of loopholes to avoid tax that Parliament never intended.
A business cannot, for instance, supply VAT exempt goods but, at the same time, recover VAT spend on its inputs. VAT evasion includes creating false accounts or returns, deliberate failure to submit VAT returns, intentional refusal to submit correct amounts or to correct errors which you knew about, and failure to obtain necessary consents.
What is VAT evasion?
VAT evasion is the most common type of tax evasion, and typically involves a business that is VAT registered which fails to declare their VAT by suppressing sales or inflating purchases. Evasion means an intentional non-payment when it is due. This also includes obtaining payment of VAT refunds falsely claimed eg. by way of input tax and output tax which was understated.
What are the sanctions for VAT evasion?
Intentional evasion of VAT is a criminal offence under section 72(1) of the Value Added Tax Act 1994. It is a serious offence carrying a possible prison sentence of 7 years. Charges can also be brought under the Fraud Act 2006.
Separately, HMRC will conduct its own investigations and impose penalties under the civil evasion penalty regime. In relation to VAT and VAT credits, the prescribed penalty is 100% of the amount evaded and, in the case of refunds and repayments, it is the aggregate of the amount of input tax which was overstated and output tax which was understated.
To prove liability for the purposes of civil evasion penalties, HMRC must prove that the person or organisation had done (or omitted to do) something that helped the organisation evade VAT, and such conduct (or omission) was dishonest. In the case of partnerships, VAT evasion by one partner binds the whole partnership, however, in the case of LLPs, liability is imposed on the LLP rather than on one member only.
Potential penalties may be mitigated by up to 40% if the business self-reports, and provides an early and honest explanation as to why there was a failure to declare the payments, and other relevant information. A reduction in penalty is also possible if you follow all necessary procedures and communicate with your investigators.
On the other hand, penalties can also be increased if it can be shown that a director’s conduct contributed to the company’s liability for civil evasion penalty. Surcharges may also be imposed for non-payment.
Criminal VAT prosecution policy
A criminal prosecution will not usually be considered in cases of VAT evasion where a full and unprompted voluntary disclosure is made, ie. the matter is self-reported early on. However, serious cases are a different matter.
A criminal investigation and prosecution will, therefore, follow in specific types of cases including:
- where there is an organised criminal gang conducting a VAT fraud
- cases involving the use of false or forged documents
- money laundering
- where someone holds a position of trust or responsibility
- cases involving deliberate concealment, deception, conspiracy or corruption
If you are being investigated for potential VAT or other tax evasion, take urgent legal advice and cooperate as fully as possible with the authorities for your best chances.