VAT Fraud: Scope, Penalties, VAT Rights, and Report Procedure

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Written by: Liez Comendador
VAT Fraud: Scope, Penalties, VAT Rights, and Report Procedure

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VAT fraud is the most common form of tax evasion in the UK, which takes on different types, from individual to multi-organisational level VAT fraud schemes. These fraudulent activities not only rob the government of VAT revenues directed to support several UK programs but also create an unfair landscape for bona fide businesses.

HMRC takes this financial crime seriously. This article will cover all that encompasses VAT fraud UK, including the types of VAT frauds, what to do during VAT investigation, what is VAT frauds penalty, how to report VAT fraud UK, taxpayers’ VAT rights, knowledge principle, and other commonly asked questions regarding this matter.

What Is VAT Fraud? 

Before discussing VAT fraud, know the basic value-added tax regulation first. Businesses with an annual revenue of more than £85,000 are required to register for VAT. Less than that amount, they can voluntarily apply. Buyers pay input VAT, whilst suppliers charge output VAT. Once VAT-registered, sole traders or companies will have to:

  • Charge correct VAT rate on their goods and services
  • Submit accurate VAT returns
  • Pay VAT to HMRC
  • Keep VAT records and account

Non-compliance or inaccuracy in performing these responsibilities can lead to serious consequences, especially if the action is deliberate. VAT fraud is considered a form of tax evasion, usually involving a VAT-registered business underreporting its sales and overreporting purchases.

The business may not charge VAT at all or continue to charge but does not pay HMRC. There are many other criminal activities related to VAT fraudulence, which will be discussed further in this article.

How VAT Fraud Is Detected 

Several dubious behaviours for VAT fraud signal HMRC into action, such as:

  • Not registering for VAT schemes when required
  • Using cash in all or most transactions
  • Asking to receive payments via various names/addresses
  • Using invalid or inaccurate VAT number
  • Anonymous or confidential tax fraud reports

These might lead to VAT audits, different penalty rates, and in worst-case scenarios, criminal prosecution and imprisonment of up to 7 years. Whilst HMRC tip-offs may be given with good intentions, they may not always be accurate. Even so, investigations can be very time-consuming, which is why it is highly recommended to employ professional buffers that specialise in VAT fraud cases UK.

Types of VAT Fraud

VAT frauds range from simple VAT evasion activities to intricately planned schemes, with VAT carousel fraud UK being the most complex and disruptive of all. Here are some known types:

Types of VAT frauds - VAT frauds may happen in a single cell (only an individual involved) or multi-cell (various firms involved)

Misrepresentation of Cash 

This form of VAT fraud arises when it is evident that a business intentionally accepts cash payments, frequently offers refunds to customers without applying VAT, and fails to report these changes to HMRC. 

Carousel Blackmail 

Here, imported goods are sold to British consumers at reduced prices without paying VAT upon importation to the UK. The scammers retain the proceeds without remitting the mandatory VAT to HMRC. 

Carousel VAT Fraud

VAT carousel fraud is also known as missing trader intra-community (MTIC). Carousel fraud involves a network of interconnected companies taking advantage of cross-border trade within the European Union to illegitimately make VAT refunds claims from the government.

Each participant in VAT carousel engages in repeated buying and selling of the same goods, with only the initial purchase in the supply chain being genuine, whilst subsequent transactions are structured to create deceptive VAT refund claims.

VAT Repayment Fraud

This offence involves falsifying documents or withholding information, aiming to illegally reclaim an excess VAT amount from HMRC, which is way bigger than the legitimate amount owed to the company. 

Cash Fraud 

Businesses intentionally falsify their records to indicate fewer sales than were legitimately generated, reducing their VAT obligations in effect.

Online Fraud

Online VAT fraud leverages digital transaction complexity and anonymity. Cybercriminals employ various techniques to exploit digital platforms and transactions for VAT fraud.

Contra Fraud 

VAT-registered entity in the UK is involved in two separate transaction chains during a single VAT period. The output tax from one chain is intentionally set up to balance out the input tax from the other chain. 

Acquisition Fraud 

This fraudulence revolves around obtaining goods or services from other European Commission member states and selling them to end consumers, which usually includes deviations from the standard invoice audit trail. 

Best Practices During VAT Investigation

Contrary to most assumptions, HMRC does not automatically have the upper hand when carrying out VAT investigations. Taxpayers have the following rights:

  • Not to answer HMRC’s inquiries when their goal is to determine whether the taxpayer will be given a fraud penalty or how much to impose
  • To seek professional advice before answering HMRC
  • To appeal against HMRC’s decisions on the VAT payable amount or penalties
Biggest VAT Fraud UK - VAT rights exist to protect taxpayers during HMRC’S VAT investigations.

Even when tip-offs end up being inaccurate, what happens when you report someone to HMRC can bring detrimental effects to the business. Once they are accused, the business may face raids, personnel arrests, account freezes, police inquiries, a years-long process, and more.

Whether deliberate or not, facing VAT investigations is a serious ordeal and not to be dealt with single-handedly. It is a wise move for businesses to hire tax experts in the UK who know how to navigate criminal law and provide a workable solution to their specific tax situation.

VAT Evasion Consequences

Initially, HMRC deals with dubious VAT behaviours through a civil evasion penalty regime. Consequences may include the following:

  • Financial penalties (up to 100 per cent of VAT payable amount, subject to penalty mitigation)
  • Prison sentence of up to 7 years
  • Liability for company key persons
  • Inclusion of people involved or member firms
  • Naming and shaming

Deliberate VAT evasion is a crime under AV fraud chapter, involving the following activities:

  • Organised criminal gang VAT fraudulence
  • Use of false or forged documents (e.g., false VAT numbers, fake invoices, etc.)
  • Money laundering
  • A member holds a position of trust or responsibility
  • Deliberate deception, concealment, corruption, or conspiracy

If found to have met the criteria for criminal prosecution, the business will face proceedings in the criminal court and be required to prepare court documents and court papers. The penalty can reach up to £20,0000 according to their VAT credits. However, if individuals or businesses involved voluntarily report themselves and actively participate throughout the process, they may be given a 40 per cent reduction from their penalty.

VAT Fraud Cases UK - HMRC may grant penalty mitigation according to the taxpayer’s level of participation in the investigation process.

A fixed-rate penalty of 30 per cent applies to those denied by HMRC for input tax or zero rate for European Union supplies. An early payment system follows the same but applies the knowledge principle, imposing a penalty of 25 per cent.

VAT Rights Vs Knowledge Principles

Whilst taxpayers have the right to claim input tax, when HMRC applies the knowledge principle, they are denied the right. VAT rights allow taxpayers to deduct input tax, apply zero VAT rate to international supplies, and others. Knowledge principle, on the other hand, is a theory where taxpayers are assumed to know or are supposed to know their activities are relevant to VAT fraud.

When an individual or business is involved in one or more VAT fraud-related transactions or knows and should have known those were fraudulent activities, HMRC will advise them not to rely on their VAT rights. Penalties will apply regardless of VAT rights.

How to Report VAT Fraud

HMRC encourages VAT fraud reports, which can be quickly and confidentially done through HMRC’s anonymous online form or via HMRC’s fraud hotline call. Failure to report the fraud may subject a person as a fraud enabler and could result in them paying the VAT amount back.  

The form consists of the following sections: 

  • The suspected individual or business’ information 
  • Their business details 
  • Information used 
  • Tipper’s personal details 
  • Form submission 

Those who give tip-offs do not have to divulge their name or personal details, but HMRC would want to know more about their suspected entities as much as possible. For their safety, they should: 

  • Not tell anyone about their crime suspicion report 
  • Not make personal and direct investigations by themselves 
  • Not ask anybody to violate the law to uncover more details 

Anyone can report a person or business on these grounds: 

  • They ask to receive money via cash to avoid paying VAT on their supply or service 
  • They ask to receive payments using different addresses or names 
  • They are not VAT-registered when they should be 
  • They claim to have a VAT number when they do not have 
  • They use false or invalid VAT numbers 

Frequently Asked Questions About Vat Fraud

How Much Does VAT Fraud Cost the UK?

HMRC estimates a loss of £400 million in tax last year from different kinds of complex VAT trading scheme. A further £800 million was lost due to other direct taxes avoidance behaviours.

What Is Common VAT Fraud?

Some of the most common VAT frauds include avoiding VAT registration when required, asking to receive payments using different names and addresses, falsely claiming expenses, importing goods or virtual assets VAT-free, selling them to customers with added VAT, failing to report VAT charged to HMRC, and failing to declare imported goods or undervaluing imported goods.

What Is an Example of Tax Fraud in the UK?

The biggest VAT fraud UK happened in Northern Ireland. The gang involved 16 false firms using 56 related bank accounts to avoid VAT and other tax obligations in the construction industry. At this time, major banks, such as Deutsche Bank, turned a blind eye to fraudulence.

How Do I Report VAT Fraud UK?

Any suspicions can be reported to HMRC via their online form or fraud hotline, quickly and confidentially.

How Legend Financial Can Help

VAT investigations may be inevitable, especially if the business belongs to an industry that HMRC targets for that tax year. Legend Financial understands how complex the UK VAT system is. Any dubious activities or inaccuracies in tax returns can easily lead to VAT fraud suspicions.

We are here to strengthen sole traders’ and businesses’ tax control framework, knowing how challenging tax aspects are for someone already juggling a lot of responsibilities. Whether you are facing VAT investigations or filing VAT returns, entrust your tax matters to our decade-long experts. Talk to us today!

References:

VAT Evasion. (n.d.). Retrieved from Tax Disputes: https://taxdisputes.co.uk/vat-evasion/

What You Need to Know About VAT Fraud. (n.d.). Retrieved from Moon Card: https://www.mooncard.co/en/use-case/vat/return/deadline/fraud

How to report VAT Fraud. (n.d.). Retrieved from St Pauls Chambers: https://www.stpaulschambers.com/how-to-report-vat-fraud/

What is VAT Fraud & How to Report It? (n.d.). Retrieved from Anthony Jones: https://anthonyjones.com/what-is-vat-fraud/

Report tax fraud or avoidance to HMRC. (n.d.). Retrieved from Gov.UK: https://www.gov.uk/report-tax-fraud

HMRC’s approach to tax fraud. (2 December 2021). Retrieved from Gov.UK: https://www.gov.uk/government/publications/
hmrc-issue-briefing-hmrcs-approach-to-tax-fraud/hmrcs-approach-to-tax-fraud

VAT Repayment Fraud. (n.d.). Retrieved from DBT & Partners: https://www.dbtandpartners.co.uk/specialisms/
tax-services/vat-repayment-fraud/

Penalties for VAT fraud. (n.d.). Retrieved from The VAT People: https://www.thevatpeople.co.uk/services/hmrc-vat-investigations/advice-hub/penalties-vat-fraud

Compliance checks: penalties for transactions connected with VAT fraud — CC/FS42. (n.d.). Retrieved from Gov.UK: https://www.gov.uk/government/publications/
compliance-checks-penalties-for-transactions-connected-with-vat-fraud-ccfs42/compliance-checks-penalties-for-transactions-connected-with-vat-fraud-ccfs42

What is VAT evasion? (n.d.). Retrieved from Claims: https://www.claims.co.uk/knowledge-base/business-finance/vat-evasion

VAT Fraud. (n.d.). Retrieved from Patrick Cannon: https://www.patrickcannon.net/practice-areas/private-client/vat-fraud/

6 Different Types of VAT Fraud Schemes. (n.d.). Retrieved from Business Insolvency: https://business-insolvency-helpline.co.uk/types-of-vat-fraud/

Reviewed by:

Picture of Fahad Lateef
Fahad Lateef
Fahad is a Chartered Certified Accountant (ACCA), proficient in numeracy and impassioned with giving concise advice to a wide range of clients related to different industries. With an immense experience of over a decade, he has worked as an advisor on different projects run by audit giants like Deloitte and others. He is a firm believer in mutual growth and an established culture of embracing change.

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