UK VAT fines if ‘should have known’ of fraud

The UK’s HMRC has launched a consultation on VAT fraud, which includes introducing potential fines on companies that ‘knew or should have known their transactions were connected with fraud’.

Arguably, EU case law points to parties in a fraudulent transaction who merely knew or should have identified the fraud (didn’t instigate or benefit from the fraud) losing the right to deduct any VAT incurred. See Axel Kittel v Belgian State. This is termed the ‘knowledge principle’.

An example test for the knowledge principle is: could there be no other reasonable explanation for a low sales price other than VAT being fraudulently excluded? This HMRC consultation covers the option to issue a fine covering this principle.  If implemented, we can explain a number of test case challenging this as overreach by HMRC.

The consultation will consider the nature of any penalties, can company Directors be made liable and a policy of naming and shaming offenders.

The UK estimated that is loses £13.5billion per annum in its VAT Gap – the difference between the expected VAT raised each year compared to actual receipts. This deficit is made up of VAT fraud, poor administrative collection policies and liquidations of companies owing VAT.