New VAT penalties regime introduced in the UK has put VAT registered businesses under more pressure and set stricter rules for accurate and timely VAT returns.
CRIMINAL OR CIVIL PROSECUTION
In cases where HMRC is aware of a VAT compliance issue, it may impose a civil penalty. It is also possible for HMRC to investigate criminally. It is up to HMRC to decide whether to conduct a criminal investigation, but not whether to prosecute. Independent prosecution authorities decide whether to prosecute a case criminally.
The following are examples of situations in which HMRC may consider starting a criminal investigation rather than a civil investigation:
- Tax fraud by organised criminal gangs or systematic frauds that pose a serious threat to the tax base, including conspiracy cases
- An individual who holds a position of trust or responsibility
- When materially false statements are made in a civil investigation or false documents are provided
- In the pursuit of an avoidance scheme, the use of a false or altered document or misrepresentation of material facts enhances the scheme’s credibility
- In cases of deliberate concealment, deception, conspiracy, or corruption
- False or forged documents cases
- Imports and exports that violate prohibitions and restrictions
- Money laundering cases involving advisors, accountants, solicitors, and others acting in a professional capacity who provide ways to hide tainted money from law enforcement
- A previous criminal record or a pattern of unlawful conduct or prior civil actions by the perpetrator
- If HMRC documents have been stolen, misused, or destroyed unlawfully
- In cases where an HMRC official has been assaulted, threatened, or impersonated
- In cases where there is suspicion of wider criminality, whether domestic or international, involving offences not under HMRC’s purview
When HMRC suspects fraud, it will consider whether the offence has been disclosed completely and unprompted. HMRC decides whether to investigate the case using civil fraud investigation procedures under Code of Practice 94 or under criminal fraud investigation procedures based on this factor.
THE HUMAN RIGHTS ACT 1998 AND PENALTIES
Taxpayers have certain rights under the Human Rights Act 1998 that are relevant to certain penalties HMRC can impose. A fact-sheet CC/FS95 should be provided to the taxpayer if HMRC considers the Human Rights Act 1998 applicable to a penalty.
VAT PENALTIES RELATED TO IMPORT
INTRODUCTION
Import VAT is subject to a penalty regime under legislation1. Penalties may apply if a ‘relevant tax or duty’ is evaded or violated. Import VAT is included in this term, which is VAT chargeable under VATA 1994, s 1(1)(c)2.
Similar to civil penalties for VAT, the penalties for noncompliance are assessed rather than demanded. A review must be undertaken by HMRC before an appeal to a tribunal may be lodged based on the appeals procedure for customs and excise duty appeals.
PENALTY FOR EVASION OF IMPORT VAT WILL APPLY WHEN
- someone engages in conduct that is intended to evade import VAT,
- It involves dishonesty (whether or not it constitutes criminal conduct)
they are liable to a penalty equal to the amount of import VAT evaded.
“Evading” means obtaining or securing without the right to do so:
- VAT refunded, rebated, or reclaimed
- Import VAT relief, exemption, or allowance
- Any deferral or other postponement of a person’s duty to pay import VAT, or any discharge by payment of such a duty
Hence, it also includes evasion of cancellation of repayments, rebates, drawbacks, reliefs, exemptions, or allowances.
As a result, ‘amount of import VAT evaded’ refers to whichever of the above applies.
LIABILITY OF DIRECTORS
‘Relevant officers’ are those who are, or who were at the time of the relevant act, either:
- a director of the body corporate, or
- a managing officer of the body corporate, ie any manager, secretary or other similar officer, or any person purporting to act in any such capacity or as a director
Accordingly, the description includes both (a) someone who was not a relevant officer at the time of the conduct but has since been appointed one, and (b) someone who was a relevant officer at the time but has since resigned or been dismissed.
In cases where members manage the affairs of a body corporate, these provisions apply as if the member was a director of the corporation in connection with their function of management.
A body corporate may recover all or part of the penalty from a relevant officer if HMRC serves a notice to that effect. In the following cases, HMRC may serve a notice:
- A body corporate is subject to a penalty under this provision,
- The penalty was imposed as a result of dishonesty on the part of a relevant officer
Both the body corporate and the relevant officer, or their representatives, are served with a notice.
PENALTY FOR CONTRAVENTION OF A RELEVANT RULE
When a person violates a duty, obligation, requirement or condition imposed by or under relevant tax or duty legislation, he or she may be liable to a penalty.
MITIGATION
HMRC (or a tribunal on appeal) can mitigate the penalty if a person evades import VAT or contravenes a law by any amount (including nil). Any mitigation may be canceled wholly or partly on review or appeal.
Tribunals and HMRC can’t consider the following:
- Unavailability of funds for payment of import VAT or penalties
- The absence of or no significant loss of any relevant tax or duty in the case in question or in combination with any other case
- A person liable for the penalty, or someone acting on his behalf, has acted in good faith.
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