Potential implications for businesses
Details enforcement action and financial impacts to businesses.
HMRC assesses tax that has been diverted through non-compliance and raises determinations of liability, undertaking compliance activity to recover tax and National Insurance contributions lost.
Interest and penalties may also be charged which can significantly increase the financial implications for businesses.
These enforcement actions are taken against businesses who are liable for payment of the tax and penalties, as deemed by legislation and caselaw. This can be the defaulter or associated businesses in the supply chain.
In addition to the liability itself, the methods that HMRC can take to recover tax losses, such as compulsory freezing orders and winding up orders can result in disruption to chains and commercial operations.
This can apply to:
- self-billing arrangements 鈥� where there is fraudulent or negligent behaviour by the supplier
- organised labour fraud and other VAT supply chain fraud 鈥� can apply at multiple points in the chain as all businesses are connected through their transactions
The Kittel principle arose from a European court judgement in the case Axel Kittel Vs Belgium State in 2006 and still applies in the UK.
The Kittel principle can be broken down into 3 questions:
- Was there a fraudulent evasion of VAT?
- Was the transaction 鈥榗onnected with鈥� the fraudulent evasion of VAT?
- Did the taxable person, when he entered into the transaction, know or should have known that it was 鈥榗onnected with鈥� fraudulent evasion of VAT?
The European Court of Justice found that a person who knew or should have known that their transaction was connected to fraud 鈥榓ids the perpetrators of the fraud and becomes their accomplice鈥� and should therefore lose their right to deduct input VAT.
An entity cannot put itself outside the Kittel test by deliberately not asking questions.
As well as the denial of input tax, a schedule 69C penalty can be applied to an officer of the company, the penalty is up to 30% of the VAT denied.
This can apply to:
- internal fraud
- fraud carried out within a supply chain
The Criminal Finances Act 2017 contains 2 offences relating to the facilitation of tax evasion. They are:
- tax evasion by a person 鈥� including employee, contractors and sub-contractors
- facilitation of tax evasion by a person 鈥� including employees, contractors and sub-contractors
The legislation means that if an 鈥榓ssociated person鈥� of a business (relevant body) criminally facilitates tax evasion and the business is unable to demonstrate that it had reasonable procedures in place to prevent such facilitation, the business is guilty of a criminal offence.
In brief:
- the relevant body (corporate body or partnership) does not have to have been aware that criminal facilitation took place, nor must it have benefitted financially or otherwise from the deliberate and dishonest behaviour
- an associated person does not have to be a direct employee of a relevant body, it can be anyone acting on their behalf 鈥� including contractors and sub-contractors
- an organisation cannot sub-contract its way out of its CCO liability or try to deem someone a non-associated person
A relevant body should be using reasonable prevention procedures to prevent fraud and the facilitation of fraud, by its associated companies or individuals in its supply chains.
Offences can result in unlimited financial penalties and a public record of conviction.
Assessments of liability relating to underpayments that can attract interest and penalties.
Assessments can apply to:
- off-payroll working (IR35) 鈥� potentially as an end-user where the rules have not been applied correctly or as an agency identified as the 鈥榙eemed employer鈥�
- self-billing arrangements 鈥� where VAT invoices are deemed invalid, for example where a business does not follow the guidance and continues to trade with a supplier who is no longer VAT registered 鈥� if connected to VAT fraud, the denial of input tax can be considered under the Kittel principle
- Construction Industry Scheme 鈥� where deductions have not been correctly made and remitted to HMRC, for example, where a contractor continues to make gross payments after a sub-contractor has lost their gross payment status
- tax avoidance 鈥� involved parties must repay tax avoided
If Income Tax and National Insurance contributions have not been deducted and paid to HMRC correctly, the following legislation determines the basis of assessment of liability and where HMRC may look to recover the tax losses in the chain:
- agency legislation
- managed service company legislation
- employment status legislation 鈥� incorrect status determination
HMRC publishes details of deliberate tax defaulters. These are people who have received penalties, either for deliberate errors in their tax returns or those who have deliberately failed to comply with their tax obligations.
HMRC publishes details relating to named avoidance schemes and associated promoters.