Businesses risk substantial fines for dealing with fraudulent companies

2nd November 2016

New proposals made by HMRC risk innocent businesses that unknowingly get caught up in VAT frauds being heavily fined, says UHY Hacker Young.

HMRC plans to fine businesses up to 30% of the VAT due, and to ‘name and shame’ them for trading with companies that commit VAT fraud, even if they were unaware of it. Thet HMRC’s consultation on ‘Penalties for participating in VAT fraud’, which closes on November 11, is aimed at creating civil penalties for company directors who commit VAT fraud. Currently, it is difficult for HMRC to impose penalties on directors without taking criminal action. But HMRC’s proposals go much further than this in hitting businesses or their directors with penalties if they “knew or should have known their transactions were connected with fraud,” which risks legitimate businesses and directors being labelled as tax fraudsters for simple mistakes or perhaps naivety in who they were dealing with.

UHY Hacker Young says that the penalties will apply even to companies that don’t trade directly with fraudulent businesses, but may be several steps removed from them in a supply chain. HMRC can allege that they ‘should have known’ that there was fraud somewhere in the supply chain, even though this is almost impossible to check for anyone but the immediate supplier and customer. Proposals under the new system is tilted too heavily in the taxman’s favour according to UHY Hacker Young. As the first-tier tax tribunal has little power to sanction HMRC when it wrongly pursues innocent companies, or to award costs to businesses that win cases against HMRC, the tax authority has little incentive to use the new power carefully or proportionately.

Simon Newark, Partner and Head of UHY Hacker Young’s VAT group, comments: “HMRC risks turning legitimate businesses that get unwittingly caught up in VAT fraud into collateral damage in its war on fraud.Fining businesses that had the bad luck to be unknowingly involved in a supply chain with a fraudster wouldn’t be a proportionate punishment, particularly if normal due diligence checks were carried out, and ‘naming and shaming’ them would risk unfairly turning them into pariahs. How many businesses can guarantee that VAT has been paid correctly at every stage in a supply chain, when success in business frequently depends on not disclosing your suppliers or customers?”

“As there’s a much lower burden of proof in a civil case than a criminal case, all that HMRC would have to prove is that, on the balance of probabilities, a business ‘should have known’ about the fraudulent activities of a business that might be several steps removed from it in the supply chain. Given that there will be no repercussions for HMRC if it gets it wrong, and that innocent businesses dragged into the tax tribunal to defend themselves can’t even reclaim their costs, there’s a real risk that HMRC could slip into using a ‘shoot first, ask questions later’ approach.”

“This new offence is an enormously powerful weapon, and there needs to be appropriate safeguards in place to make sure HMRC uses it responsibly. Such safeguards are conspicuously missing from the proposals as they stand, which places all the obligations and risk on businesses but none on HMRC. There is a real need to reduce the amount of large-scale VAT fraud occurring, and HMRC must commit to using their resources appropriately rather than focussing on the small businesses that might be unwitting victims, but also seen as easy targets for HMRC.”