What does HMRC advise businesses on VAT fraud prevention?

VAT fraud has been an ongoing issue for many years, but now it has prompted HM Revenue and Customs (HMRC) to produce what can only be seen as a warning to those in business, to ensure they do not become involved in it.

Its “Penalties for transactions connected with VAT fraud’’ factsheet outlines HMRC’s system whereby it claims the full amount of VAT that was not paid and imposes a 30% penalty. So, for every £1,000 in VAT that was not paid, the company will have to pay £1,300. In what the HMRC considers the more serious cases, it will also publish the details of the companies – and sometimes the individuals – involved.

The HMRC document explains that companies can avoid penalties for VAT fraud in future “by not becoming involved in any transactions connected with VAT fraud’’.

This is perhaps not the most illuminating piece of advice on prevention of business crime compared with HMRC’s ‘How to spot missing trader VAT fraud’ which is a worthwhile read, emphasising the need for anyone in business to make proper checks on current and potential customers and suppliers.

Missing trader fraud is committed when goods are imported VAT-free from EU countries then sold on at prices that include the VAT but the seller never pays the VAT he received from the sale. Complex networks of companies and lengthy chains of transactions are often used to repeatedly sell the same goods and disguise the fraud.

The HMRC’s guide is effectively its way of telling business how to behave so that the taxman is not defrauded out of VAT. It informs those in business they need to make judgements regarding the integrity of their supply chains by assessing the background and credibility of those they trade with and the legitimacy of the goods that are being traded.

HMRC also expects any checks carried out to be “appropriate, adequate and timely in relation to addressing the risks identified’’, yet it also makes it clear that the HMRC will not tell those in business exactly what checks should be made.

It states: “The checks you will need to make, and the extent of them, will vary depending on the individual circumstances of your trade and it is for you to consider what questions you need to ask to protect yourself in the particular circumstances of your individual transactions.’’

So what steps should companies be taking in order to make sure they do not become involved in VAT fraud?

HMRC’s call for checks on the parties and products in a transaction makes perfect sense. As does its emphasis on checking all available documentation. Complete due diligence on companies and retention of every piece of paperwork is vital.

But a company also has to take a forward-thinking view of fraud prevention. It needs to examine its workplace procedures to see if they are fit for purpose. Are they capable of preventing – or at least identifying – VAT fraud? If not, new procedures must be devised and introduced. If a company feels this is beyond its capabilities, it needs to enlist expert help to ensure this challenge is met properly.

Procedures can be meaningless if the people that they apply to are unaware of the seriousness of VAT fraud, which is why staff training has to be seen as an essential component of any prevention strategy.

If staff, for example, do not know what tell-tale signs to look for or how to respond to them, there will be little chance of VAT fraud being recognised and tackled. Again, this is an area where outside expertise should be sought when necessary.

Some types of business may, through no fault of their own, face a greater risk of VAT fraud.

Potential risk of fraud could be affected by the number of traders involved in a chain, the complexity of the payment arrangements, or the number of jurisdictions that goods are moved between.

But none of these can be considered an excuse, which is why the previously mentioned precautions must be taken.

If you are under investigation for VAT fraud, believe you may be in the near future, or have fears that it may be being committed in your company, expert legal advice must be sought immediately.

Only then will you know how best to proceed.

Nicola Sharp is a senior lawyer at business crime experts Rahman Ravelli.