VAT evasion is serious form of tax fraud and is treated seriously both by the courts and HMRC. It may result in civil penalties, interest and default surcharges under VAT legislation, as well as potential criminal charges.
VAT is a tax charged on the supply of goods and services by UK businesses. The goods or services must constitute taxable supplies and must be made by a taxable person in the course of business. A taxable supply is a supply which is not exempt, and a taxable person is a person or business required to be registered for VAT purposes.
A person or business organisation is required to be registered for VAT purposes if the amount of their taxable supplies exceeds £85,000 per year. If your taxable supplies are less than £85,000, you can voluntarily register for VAT.
This is the VAT paid by the buyer on the supply of the goods and services to the supplier. It is the element added to the net price of goods and supplies that are subject to VAT.
This is the VATadded by a person or business when it supplies goods and services and they are registered for VAT.
It is important to distinguish between different types of supply which can be standard rated at 20%, lower rated at 5% (eg. domestic heating, power, loft installation etc), eg. zero rated (books, public transport, food,) or exempt (eg. health services, education, insurance, finance).
Tax avoidance is the use of tax and other laws to reduce your tax burden and is not illegal. Tax evasion, on the other hand, is the illegal evasion of taxes by individuals and businesses. Tax evasion can take many different forms, and it now seems to include extensive exploitation of loopholes to avoid tax that Parliament never intended.
A business cannot, for instance, supply VAT exempt goods but, at the same time, recover VAT spend on its inputs. VAT evasion includes creating false accounts or returns, deliberate failure to submit VAT returns, intentional refusal to submit correct amounts or to correct errors which you knew about, and failure to obtain necessary consents.
VAT evasion is the most common type of tax evasion, and typically involves a business that is VAT registered which fails to declare their VAT by suppressing sales or inflating purchases. Evasion means an intentional non-payment when it is due. This also includes obtaining payment of VAT refunds falsely claimed eg. by way of input tax and output tax which was understated.
Intentional evasion of VAT is a criminal offence under section 72(1) of the Value Added Tax Act 1994. It is a serious offence carrying a possible prison sentence of 7 years. Charges can also be brought under the Fraud Act 2006.
Separately, HMRC will conduct its own investigations and impose penalties under the civil evasion penalty regime. In relation to VAT and VAT credits, the prescribed penalty is 100% of the amount evaded and, in the case of refunds and repayments, it is the aggregate of the amount of input tax which was overstated and output tax which was understated.
To prove liability for the purposes of civil evasion penalties, HMRC must prove that the person or organisation had done (or omitted to do) something that helped the organisation evade VAT, and such conduct (or omission) was dishonest. In the case of partnerships, VAT evasion by one partner binds the whole partnership, however, in the case of LLPs, liability is imposed on the LLP rather than on one member only.
Potential penalties may be mitigated by up to 40% if the business self-reports, and provides an early and honest explanation as to why there was a failure to declare the payments, and other relevant information. A reduction in penalty is also possible if you follow all necessary procedures and communicate with your investigators.
On the other hand, penalties can also be increased if it can be shown that a director’s conduct contributed to the company’s liability for civil evasion penalty. Surcharges may also be imposed for non-payment.
A criminal prosecution will not usually be considered in cases of VAT evasion where a full and unprompted voluntary disclosure is made, ie. the matter is self-reported early on. However, serious cases are a different matter.
A criminal investigation and prosecution will, therefore, follow in specific types of cases including:
If you are being investigated for potential VAT or other tax evasion, take urgent legal advice and cooperate as fully as possible with the authorities for your best chances.
Nicola is a dual qualified journalist and non-practising solicitor. She is a legal journalist, editor and author with more than 20 years' experience writing about the law.
When you submit your details, you'll be in safe hands. Our partners are National Accident Helpline (a brand of National Accident Law, a firm of personal injury solicitors regulated by the Solicitors Regulation Authority). They are the UK's leading personal injury service. Their friendly legal services advisers will call you to talk about your claim and give you free, no-obligation advice. National Accident Law may pay us a marketing fee for our services.
By submitting your personal data, you agree for your details to be sent to National Accident Law so they can contact you to discuss your claim.
If you win your case, your solicitor's success fee will be taken from the compensation you are awarded - up to a maximum of 25%. Your solicitor will discuss any fees before starting your case.