VAT investigations

Never underestimate the considerable powers of Customs and Excise. Apart from those conferred upon them by the VAT Act 1994, Customs also use the powers contained in the Police and Criminal Evidence Act 1984 and the Customs and Excise Management Act 1979. They include search of premises and persons, seizure of documents and goods, and arrest.

Since 1985 VAT investigations have followed one of two routes:

1. Criminal – where the investigation is prosecuted with a view to criminal offences under S.72 VAT Act 1994. The VAT involved may be a relatively small amount but if the alleged fraud has involved sophisticated procedures then Customs usually investigate the matter criminally. Potential defendants are questioned under caution and interviews taped. A court case will follow unless Customs agree to ‘compound’ the matter under S.152 Customs and Excise Management Act 1979. This involves paying a monetary fine but will remove any possibility of the taxpayer receiving a criminal record.

2. Civil evasion involving dishonesty is an offence under S.60 VAT Act 1994. Offenders cannot incur a criminal record but are likely to pay substantial fines instead. Potential defendants are not interviewed under caution but interviews are usually taped and the taxpayer is given an inducement to make a full disclosure. By so doing, the level of fines can be mitigated. The VAT involved in a civil investigation can be very high if the evasion has been perpetrated in an essentially simple way.

In September 2000, Customs announced a revision of their civil investigation procedures. This involved a trial period of one year in selected areas of the UK. The principle is that instead of Customs undertaking a lengthy investigation, the taxpayer and his advisers will do the work instead and produce a full disclosure report within an agreed timescale. A full disclosure will earn a low financial penalty. This has apparently proved so successful in terms of generating a greater yield of previously evaded VAT and cutting down on Customs’ time spent investigating such matters that this approach has been extended nationwide.

However, since the introduction of the Human Rights Act in England and Wales in October 2000, Customs and Excise have been challenged over their civil investigation techniques. The argument is that a S.60 offence is serious and should be dealt with as a criminal matter and therefore the potential defendant should be given the right to remain silent and not incriminate himself.

This challenge has so far been successful for the taxpayer in the VAT Tribunal and is awaiting hearing at the Court of Appeal. A successful outcome will cause problems for Customs because they will lose a considerable amount of revenue from civil evasion penalties which have been imposed on taxpayers. It is also likely to mean that more investigations will be taken as criminal matters.

In the meantime, there is evidence that Customs are already changing their investigation techniques. Cases which would previously have been taken under S.60 civil route are now being taken as S.72 criminal matters. Also, Customs are looking at new ways of penalising taxpayers without have to resort to a full investigation. This may involve the use of the misdeclaration penalties under S.63 and 64 VAT Act 1994. Whilst this may be seen as an acceptable alternative to undertaking an investigation, it actually places a taxpayer in a very precarious situation. In effect it puts him on notice that if any of his VAT returns do not show the kind of VAT declaration which Customs think is appropriate then they will impose further monetary fines. The taxpayer does have a recourse to a VAT Tribunal to challenge this approach. However, it is an unsatisfactory situation and one which all businesses must be aware of.

Customs and Excise and the Inland Revenue have started to work together on a day-to-day basis. New units are being set up around the country comprising small numbers of Customs and Revenue personnel working as a Shadow Economy team. Customs are using these teams to target businesses who are not registered for VAT.

Whilst any investigation remains a stressful and lengthy experience, it is clear that Customs’ investigation techniques are under the microscope.

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