VAT Recovery by Dishonest Means

A VAT-registered company or sole trader may be liable to a financial penalty if they attempt to obtain a VAT credit or refund to which they are not entitled to by dishonest means. This was the case in Peter Arakiel Brookes vs HMRC where Mr. Brookes appealed against HMRC’s initial decision to deny recovery of approximately £40,000 of VAT that they believed had been attained dishonestly.

 

The Upper Tribunal heard the case relating to Mr Brookes company, Villagepark Homes Limited (“VPH”), for which Mr. Brookes was the sole director. VPH undertook a property development for which Focus Strip Limited (“Focus”) were the main contractor.

 

During a visit from HMRC to VPH, an officer noted that the records necessary to facilitate VAT recovery were not present, specifically valid VAT invoices relating to the services supplied to VPH by Focus for which VAT had already been recovered.  Due to no invoices having been issued at the time of the supply, the VAT element of the supply that had been recovered by Mr Brookes was the appropriate percentage of the gross amount charged. However, on HMRC challenging this, and for the purposes of the case, ‘fabricated copy invoices’ were provided retrospectively, first to Mr Brookes, who then, in turn, provided them to HMRC even though Mr Brookes himself had described them as ‘useless’, thus raising the question of dishonesty.

 

Whilst the question of dishonesty could not be settled by the Upper Tribunal due to it being unclear whether the copy invoices that appeared to have been produced for the purposes of the case were done so by Mr Brookes or by Focus, this demonstrates that input VAT should not be recovered unless the taxpayer is fully satisfied that they are entitled to recovery and that all necessary criteria are satisfied in order to prevent exposing the business to potential financial penalties.

 

This case arose from a taxable person recovering VAT that they were not entitled to recover due to not holding the correct evidence to facilitate recovery. To clarify your recovery position, speak to one of our experienced VAT consultants on our free VAT helpline.

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