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‘Innocent’ companies will be hit by tough HMRC anti-fraud powers

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BUSINESSES WILL FACE substantial fines from getting caught up with fraudulent companies, under new HMRC proposals.

UHY Hacker Young said that HMRC’s consultation on ‘Penalties for participating in VAT fraud’, which closes on 11 November, 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.

The consequences are severe with fines and criminal action  – yet the proposals lack the safeguards that ensure HMRC will use this power responsibly, according to UHY Hacker Young.

Businesses may unknowingly be caught up in VAT and being heavily fined, the firm said, as 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 unaware of it.

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.

Simon Newark, partner and head of UHY Hacker Young’s VAT group, said: “Given that there will be no repercussions for HMRC if it gets it wrong, and that innocent businesses dragged into the tax tribunal can’t reclaim their costs, there’s a real risk.”

The fines may mean that legitimate businesses and directors risk being labelled as tax fraudsters for simple mistakes or perhaps naivety in who they were dealing with.

Simon Newark, added: “HMRC risks turning legitimate businesses that get unwittingly caught up in VAT fraud into collateral damage.”

The penalties will apply even to companies trading indirectly, and through the supply chain, HMRC allege that they ‘should have known’ even though this is “almost impossible to check” said UHY Hacker Young.

Newark added: “Fining businesses that had the bad luck to be unknowingly involved in a supply chain with a fraudster wouldn’t be a proportionate punishment. How many businesses can guarantee that VAT has been paid correctly at every stage when success frequently depends on not disclosing your suppliers or customers?”

He concluded: “There is a real need to reduce VAT fraud and HMRC must commit to using their resources appropriately rather than focusing on the easy to target small businesses.”

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