VAT Fraud & The Risks to Your Business

Written by AJN Accountants
23 February 2024

In the world of VAT, a business can be unaware of a fraud in the supply chain and still be regarded as a fraudster, if they have not properly vetted their suppliers or has ignored signs of potential connections to fraud.

In 2023 alone there were three high-profile successful assessments on unwitting parties for supply-chain frauds and no defeats for HMRC.

Each time, the tribunals’ decisions were driven by the ‘should-have-known’ principle which can be summarised as follows: you may have acted in good faith, but if the tax authority can prove it was sufficiently easy to spot you were trading with fraudsters but you didn’t spot it, you must be treated as a participant in the fraud and bear any VAT loss suffered by HMRC (and often pay a hefty fine, too).

This may sound worrying for UK VAT-registered persons, but there is no need to panic. Verifications must be done regularly as fraudsters typically de-register after completing VAT registration. A robust set of onboarding procedures for new suppliers and recurring checks for existing business partners are usually enough to discharge the burden of proof in respect of whether a party should have known that it was doing business with fraudsters.

Steps your business should take as a matter of routine

The following steps should be taken as a matter of routine:

1.     Verify the validity of VAT numbers each time you deal with a new supplier

2.     Re-verify these every 6 to 12 months for each supplier

3.     Review any deals that may seem too good to be true for the supplier and seek advice where suspicious

4.     Conduct online checks on the business and the decision makers

5.     Check the legal entity issuing the invoice is the same as the contractual party

You can verify the validity of the VAT numbers of all counterparts on the free  HMRC and EU Commission online VAT checkers. However, it is not enough to ensure that VAT numbers are valid when new suppliers are onboarded. These verifications must be done regularly and routinely, as fraudsters typically de-register shortly after completing the VAT registration process; they initially appear as genuine and reliable traders, only to later disappear with the VAT collected but unremitted to the authority.

You should ensure that a transaction is in theory commercially viable for the suppliers. Often, fraudsters offer unsolicited, ‘too-good-to-be-true’ deals with the sole intention to charge and steal the VAT.

Be wary of suppliers with little or no trading history. Numerous checks can be done by consulting the Companies House website, where there is publicly available information on current and past directors, the year of incorporation, any change of ownership and all financial results.

Susceptible industries

Although VAT frauds may occur in all industries and involve services as well as goods, some sectors are more susceptible to fraud than others – for example, those with high-frequency trades and concerning either intangible or difficult-to-trace products.

A typical VAT fraud scheme involves a fraudulent company buying VAT-free products/services from overseas, selling them domestically and correctly charging 20% VAT to an unwitting company, which pays and later reclaims the VAT from HMRC as input tax. The VAT is lost as a result of the fraudster not remitting any money to HMRC and disappearing.

The scheme can also involve multiple recirculation of the same goods or services through an accomplice based overseas, which buys from the unaware party and resells VAT-free to the UK fraudulent company, which in turn perpetrates the same VAT fraud over and over again. This is known as carousel fraud.

In its VAT Manual, HMRC explains that if a taxable person has incurred input tax that is properly allowable, they are entitled (subject to certain rules) to set it against their output tax liability; and, if the input tax credit due to them exceeds the output tax liability, they can claim a repayment. However, a taxpayer who claims input tax on transactions that they ‘knew or should have known’ were ‘connected with fraudulent evasion of VAT’ will be denied their right to claim that input tax.

Businesses may find the implementation of rigorous onboarding processes and regular checks daunting. But with courts consistently backing HMRC in fraud cases, the implementation of multiple reverse-charge mechanisms and the introduction of the Corporate Criminal Offence legislation, it’s never been more important for businesses to step up their protective measures.

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