Does Your Business Exercise Sufficient Diligence With its VAT Affairs?

Having little or no evidence of due diligence being carried out can be sufficient for HMRC to accuse a business of being either knowingly or unknowingly involved in VAT fraud. This can have serious implications if the business is unwittingly being used to “whitewash” a VAT fraud being carried out by associated third parties.

HMRC relies on two relevant cases, Kittel and Ablessio, to support the department’s punitive action against businesses that “knew or should have known” that transactions are connected to VAT evasion.  This type of action was commonly used by HMRC in the past to target businesses involved in so-called carousel frauds where goods that often were of a low value but sold in bulk were purchased and sold as part of a supply chain where one or more participants in the chain were involved in a fraud to divert VAT from HMRC.

HMRC has recently started using Kittel and Ablessio as a means to attack businesses involved in other sectors such as the building sector.  A recent example of this is the First Tier (Tax) Tribunal decision in the case of Promeridian Services’ where HMRC’s view of the actions of the business seems to have been tainted by the poor record keeping and recollection of the director leading to HMRC blocking input tax recovery of £559,896, issuing a penalty of £167,968 and making the director personally liable for a s69C penalty.

Some of the factors HMRC took to indicate fraud occurring were loss of copies of key contracts, reliance on a supplier (TCS) who subsequently became a missing trader and lack of bad debt insurance.

Fortunately for the director in the Promeridian Services case, the First Tier Tribunal found in favour of the business. This was on the basis that whilst it had some reservations regarding the veracity of Promeridian’s Services director and what HMRC took to indicate fraud were perhaps suspicious, they were not sufficient to show Promeridian Services knew or should have known that TCS was involved in fraud.

A lot of time costs and heartache can be avoided by ensuring that an organisation has procedures in place to demonstrate that it understands how to account for VAT, carries out due diligence checks on suppliers with evidence to back this up and has staff that understands how to deal with transactions from a VAT view-point. 

Here at The VAT People, we can assist you in understanding your VAT obligations and can provide VAT training for you and your staff. VAT training has been proven to form a means of evidence that a business carries out due diligence and thus helps mitigate the risk of penalties. Contact our free VAT advice line on 0161 477 6600 to discuss your VAT training or advisory requirements.