Category Archives: Penalties

HMRC announces Top 10 prosecutions of 2018

By Marcus Ward 11 January 2019

The publication of this annual list is an insight into the work of HMRC’s Fraud Investigation Service. Clearly this is important work and recovers money that may be used to support important public services and consequently, it is not a victimless crime.

It further demonstrates the diversity of crimes HMRC deals with. HMRC’s fraud investigations have led to 671 people being convicted over the last 12 months for their part in tax crimes. Additionally, HMRC has charged another 919 people and taken on 746 new criminal investigations.

This year’s top 10 prosecutions include:

one of the UK’s most wanted tax fugitives, who spent more than 11 years on the run and owes more than £53 million, ending up behind bars after he was caught in Canada
a tax consultant, who fled the UK before he could be arrested for masterminding a conspiracy to steal £6.9 million from construction workers’ pay packets, going to prison
a high-flying businessman who masterminded a sophisticated £9.8 million international VAT fraud to fund his lavish lifestyle and for which he was jailed for 9 years

HMRC’s Fraud Investigation Service brings in around £5 billion a year through civil and criminal investigations.

VAT Invoices – A Full Guide

By Marcus Ward 3 January 2019

The subject of invoices is often misunderstood and can create serious issues if mistakes are made. VAT is a transaction tax, so primary evidence of the transaction is of utmost importance. Also, a claim for input tax is usually not valid unless it is supported by an original valid invoice HMRC can, and often do, reject input claims because of an inaccurate invoice. There are a lot of misconceptions about invoices, so, although a rather dry subject, it is very important and I thought it would be useful to have all the information in one place, so here is my guide:

Obligation to provide a VAT invoice

With certain limited exceptions a VAT registered person must provide the customer with an invoice showing specified particulars including VAT in the following circumstances.

(a) He makes a supply of goods or services in the UK (other than an exempt supply) to a taxable person.

(b) He makes a supply of goods or services to a person in another EC country for the purposes of any business activity carried on by that person. But no invoice is required where the supply is an exempt supply which is made to a person in another EC country which does not require an invoice to be issued for the supply. (Because practice varies widely across the EC, HMRC guidance is that businesses should be guided by their customers as to whether invoices are required for exempt supplies.)

(c) He receives a payment on account from a person in another EC country in respect of a supply he has made or intends to make.

Exceptions

The above provisions do not apply to the following supplies.

• Zero-rated supplies (other than supplies for acquisition by a person registered in another EC country, see (b) above).

• Supplies where the VAT charged is excluded from credit under VATA 1994, s 25(7) (eg business entertaining and certain motor cars) although a VAT invoice may be issued in such cases.

• Supplies on which VAT is charged but which are not made for a consideration. This includes gifts and private use of goods.

• Sales of second-hand goods under one of the special schemes. Invoices for such sales must not show any VAT.

• Supplies that fall within the Tour Operators’ Margin Scheme(TOMS). VAT invoices must not be issued for such supplies.

• Supplies where the customer operates a self-billing arrangement.

• Supplies by retailers unless the customer requests a VAT invoice.

• Supplies by one member to another in the same VAT group.

• Transactions between one division and another of a company registered in the names of its divisions.

• Supplies where the taxable person is entitled to issue, and does issue, invoices relating to services performed in fiscal and other warehousing regimes.

Documents treated as VAT invoices

Although not strictly VAT invoices, certain documents listed below are treated as VAT invoices either under the legislation or by HMRC.

(1) Self-billing invoices

Self-billing is an arrangement between a supplier and a customer in which the customer prepares the supplier’s invoice and forwards it to him, normally with the payment.

(2) Sales by auctioneer, bailiff, etc.

Where goods (including land) forming part of the assets of a business carried on by a taxable person are, under any power exercisable by another person, sold by that person in or towards satisfaction of a debt owed by the taxable person, the goods are deemed to be supplied by the taxable person in the course or furtherance of his business.

The particulars of the VAT chargeable on the supply must be provided on a sale by auction by the auctioneer and where the sale is otherwise than by auction by the person selling the goods. The document issued to the buyer is treated as a VAT invoice.

(3) Authenticated receipts in the construction industry.

(4) Business gifts

Where a business makes a gift of goods on which VAT is due, and the recipient uses the goods for business purposes, that person can recover the VAT as input tax (subject to the normal rules). The donor cannot issue a VAT invoice (because there is no consideration) but instead may provide the recipient with a ‘tax certificate’ which can be used as evidence to support a deduction of input tax. The tax certificate may be on normal invoicing documentation overwritten with the statement:

“Tax certificate – No payment is necessary for these goods. Output tax has been accounted for on the supply.”

Full details of the goods must be shown on the documentation and the amount of VAT shown must be the amount of output tax accounted for to HMRC.

Invoicing requirements and particulars

A VAT invoice must contain certain basic information.

A VAT invoice must show the following particulars.

(a) A sequential number based on one or more series which uniquely identifies the document.

The ‘invoice number’ can be numerical, or it can be a combination of numbers and letters, as long as it forms part of a unique and sequential series. Where there is a break in the series, eg; where an invoice is cancelled or spoiled and never issued to a customer, this is still acceptable as long as the relevant invoice is retained.

(b) The time of the supply, ie tax point.

(d) The name, address and registration number of the supplier.

(e) The name and address of the person to whom the goods or services are supplied.

(f) A description sufficient to identify the goods or services supplied.

(g) For each description, the quantity of the goods or extent of the services, the rate of VAT and amount payable, excluding VAT, expressed in any currency.

(h) The unit price.

This applies to ‘countable’ goods and services. For services, the countable element might be, for example, an hourly rate or a price paid for standard services. If the supply cannot be broken down into countable elements, the total VAT-exclusive price is the unit price.

(i) The gross amount payable, excluding VAT, expressed in any currency.

(j) The rate of any cash discount offered.

(k) The total amount of VAT chargeable expressed in sterling.

(l) Where the margin scheme for SECOND-HAND GOODS or theTOMS is applied, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994or any indication that the margin scheme has been applied.

The way in which margin scheme treatment is referenced on an invoice is a matter for the business and but we recommend:

• “This is a second-hand margin scheme supply.”

• “This supply falls under the Value Added Tax (Tour Operators) Order 1987.”

The requirement only applies to TOMS invoices in business to business transactions.

(m) Where a VAT invoice relates in whole or in part to a supply where the person supplied is liable to pay the VAT, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994 or any indication that the supply is one where the customer is liable to pay the VAT.

This covers UK supplies where the customer accounts for the VAT (eg under the gold scheme or any reverse charge requirement under the missing trader intra-community rules). The way in which margin scheme treatment is referenced on an invoice is a matter for the business and we recommend: “This supply is subject to the reverse charge”.

Exempt or zero-rated supplies

Invoices do not have to be raised for exempt or zero-rated transactions when supplied in the UK. But if such supplies are included on invoices with taxable supplies, the exempt and zero-rated supplies must be totalled separately and the invoice must show clearly that there is no VAT payable on them.

Leasing of motor cars

Where an invoice relates wholly or partly to the letting on hire of a motor car other than for self-drive, the invoice must state whether the car is a qualifying vehicle

Alternative evidence to support a claim for input tax

In certain situations HMRC can use its discretion and allow an input tax with documentary evidence other than an invoice. Their guidance here

Electronic invoices

Full information on electronic invoicing here

Retailers

Retailers may issue a “less detailed tax invoice” if a customer requests one. the supply must be for £250 or less (including VAT) and must show:

your name, address and VAT registration number
the time of supply (tax point)
a description which identifies the goods or services supplied
and for each VAT rate applicable, the total amount payable, including VAT and the VAT rate charged.

Summary

As may be seen, it is a matter of law whether an invoice is valid and when they must be issued. Therefore it is important for a business to understand the position and for its system to be able to produce a valid tax invoice and to recognise what is required to claim input tax. As always with VAT, there are penalties for getting documentation wrong. Please contact us should you have any queries.

EC clamp down on yacht and aircraft VAT abuse

By Marcus Ward 8 November 2018

The European Commission (EC) has stepped up its agenda to tackle tax avoidance in the yacht and aircraft sectors by implementing infringement proceedings on tax breaks being applied in the pleasure craft industries of the Isle of Man. These provisions can generate major distortions of competition, as highlighted by last year’s ‘Paradise Papers’ leaks.

The EC has sent a formal notice to the UK in respect of the Isle of Man’s abusive VAT practices relating to sales and leasing of aircraft.

Background

Input tax is only deductible when it relates to business use of an asset. The EC says that supplies of aircraft, including leasing services, intended expressly for private use, should not be effectively VAT free. The EC believes that the UK has not taken sufficient action against abusive VAT practices in the Isle of Man on supplies and leasing of aircraft. This perceived abuse is facilitated by UK national rules which do not comply with EU law.

Broadly, arrangements are made such that a (seemingly) artificial leasing businesses is put in place and through which individuals rent their own jets from themselves. The most high-profile example of this structure is one used by Lewis Hamilton for his private jet.

Features of such arrangements are said to be:

Users of the scheme recover 100% of import VAT when it appears that an adjustment should be made for the proportion of the amount of private use intended for the aircraft
VAT should be declared and paid to any European Member States whose airports are used for leisure flights.
The leasing businesses set up for jets usually appear to be a letterbox companies with no real economic purpose. Consequently, it is unlikely that such entities should be entitled to reclaim VAT from the Isle of Man.

It is understood that the Isle of Man government has called in the HMRC which will review of 231 tax refunds issued to private jet owners since 2011 valued at circa $1billion of VAT.

Representatives of the EC are due to visit the Isle of Man this month. Similar action is being taken against Italy in respect of the lease of yachts and excise duty rates for motor boats.

What happens next?

The UK now has two months to respond to the arguments put forward by the EC regarding VAT on aircraft. If the UK authorities do not act within those two months, the EC will send a reasoned opinion. If the UK does not act within the next two months on the reasoned opinion the EC may bring the case before the Court of Justice of the EU.

Pierre Moscovici, the Commissioner for Economic and Financial Affairs, Taxation and Customs Union, said: “It’s simply not fair that some individuals and companies can get away with not paying the correct amount of VAT on products like yachts and aircraft. Favourable tax treatment for private boats and aircraft is clearly at odds with our commonly agreed tax rules and heavily distorts competition in the maritime and aviation sectors. With this in mind, the Commission is taking action to clamp down on rules that try to circumvent EU law in these areas.”

For More Information

On the general infringements procedure, MEMO/12/12.

On the EU infringements procedure.

Commentary

We do not design, sell or advocate such schemes. Our view is that these and similar structures are, quite rightly, open to attack from the relevant authorities. They do not reflect well on those that put these structures in place nor those that benefit from them. Using a leasing scheme as such is not necessarily abusive. However, if one takes the other elements in the targeted schemes into consideration, such as the absence in motive of setting up those companies and the fact that those companies do not seem to have any substance, it is likely to lead to the action we see from the EC and its view that these schemes are abusive.

How Brexit will impact on these and similar situations remains to be seen.

VAT – No more compensation for delayed refunds?

By Marcus Ward 7 September 2018

HMRC has announced its intention to do away with the 5% repayment supplement payable when it repays VAT late; it is not good news and I am quite cross.

Background

What is the repayment supplement?

Repayment supplement is a form of compensation paid in certain circumstances when HMRC does not authorise payment of a legitimate VAT claim within 30 days of receipt of the VAT Return.

If a business submits a repayment return and HMRC does not make the repayment within 30 days, it is required to add interest at 5% to the amount of the claim. A repayment claim arises when input tax is greater than output tax for a period. This may be due to many factors, such as; sales being VAT free, a large VAT bearing purchase or an adjustment to previous declarations. The 30 day period is paused for “the raising and answering of any reasonable inquiry relating to the requisite return or claim” by HMRC.

Additionally, HMRC may make an extra ex-gratia payment to make good any serious disadvantage suffered if a repayment is delayed to an exceptional extent, and the repayment supplement is less than the interest which might otherwise have been earned.

The proposal

In a consultation on draft legislation for Finance Bill 2018-19 the government has announced that it intends to replace the 5% supplement with payment of simple interest. This currently stands at 0.5% pa and therefore a substantially lower payment would be due to a taxpayer.

Technical

The relevant legislation covering the repayment supplement is contained in The VAT Act 1994 Section 79

Commentary

The entire point of the supplement is to focus HMRC’s mind on making the payment at the appropriate time, just as the default surcharge does for submitting a VAT return and paying VAT for a business. This is fair. To withdraw the repayment supplement does away with any incentive for HMRC to make repayments on time and this must represent an imbalance. To effectively withhold money from a business to which it is properly entitled is plain wrong. It can often significantly impact on cashflow and cause serious problems for a business.

It is quite often a fight to obtain a repayment supplement and in my personal experience HMRC do as much as possible to resist making these payments. It is no surprise that they are trying to wriggle out of their responsibility.

Let us hope that representations to HMRC against this plan are successful.

Right, I’m going to cool off…

VAT – Top 10 Tips for small businesses and start ups

By Marcus Ward 5 July 2018

VAT Basics

Small business and start ups have a lot of things to think about – VAT being just one. However, failure to consider VAT can lead to difficulties and penalties. So here are some pointers for new and/or growing bushiness:

Plan ahead and know when to register for VAT
Make contact with your advisers
Monitor your turnover so that you know when you are approaching the VAT registration threshold
Keep your records up-to-date and check accounting documents
Speak to us if things go wrong or there’s something you don’t understand
Deal with VAT enquiries or HMRC’s requests for information promptly
Manage the VAT within your business cashflow
Don’t worry if Customs make contact with you
Right tax – right time
If you are not happy with Customs’ behaviour or have received an unhelpful or incorrect ruling; challenge it.

The overall message is; talk to a professional at an early stage. Timing is very important for VAT and you usually only have one chance to get it right.

Finally, regarding the first point – it may benefit a business to VAT register before it is required to (a so-called voluntary registration). I shall look at that in more depth in my next article.

The VAT gap rises

By Marcus Ward 20 June 2018

In the latest figures released by HMRC the amount of unpaid tax has increased by circa £1 billion.

What is the tax gap?

The VAT gap is the difference between the amount of VAT that should, in theory, be collected by HMRC, against what is actually collected. The ‘VAT total theoretical liability’ (VTTL) represents the VAT that should be paid if all businesses complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law, referred to as the spirit of the law below.

Summary

Here is an overview of the figures which are for the year 2016-17:

The VAT gap is estimated to be £11.7 billion in which equates to 8.9% of net VAT total theoretical liability. HMRC report that there has been a long-term reduction between 2005-06 and 2016-17 for the VAT gap (12.5% to 8.9%). The information is provided by The Office for National Statistics, National Accounts Blue Book 2017 and Consumer Trend.

MTIC

The Missing Trader Intra-Community (MTIC) fraud estimate reduced to less than £0.5 billion in 2016-17, from between £0.5 billion and £1 billion in 2015-16.. VAT debt has been fairly stable since 2011-12. It is estimated at £1.5 billion in 2016-17. Around 70% of the VAT total theoretical liability in 2016-17 was from household consumption. The remaining gap was from consumption by businesses making exempt supplies and from the government and housing sectors. Around half of household VAT-able expenditure was from restaurants and hotels, transport and recreation and culture.

VAT debt

The contribution of debt to the VAT gap is defined as the amount of VAT declared by businesses but not paid to HMRC. The VAT gap showed a peak at 12.6% in 2008-09, which was partly because the recession caused an increase in VAT debt from £0.9 billion in 2007-08 to £2.4 billion in 2008-09. VAT debt has been fairly stable since 2011-12. It is estimated at £1.5 billion in 2016-17.

Avoidance

VAT avoidance is another component of the VAT gap. HMRC say that avoidance is artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter, but not the spirit, of the law. VAT avoidance is estimated at £0.1 billion in 2016-17.

Other indirect taxes

The overall excise tax gap is estimated to be £4.1 billion (£3.1 billion in excise duty and £1 billion in VAT). This is analysed as:

£2.5 billion tobacco tax gap, with associated losses in tobacco duty (£1.9 billion) and VAT (£0.5 billion )
£1.3 billion alcohol tax gap, with associated losses in alcohol duty (£0.9 billion) and VAT (£0.4 billion)
£150 in GB diesel duty and associated VAT
£40 in Northern Ireland (NI) diesel duty and associated VAT
£170 in other excise duties

Overall tax gap

The report indicates that small businesses were most likely to be underpaying tax generally. They accounted for £13.7 billion of last the overall tax gap. Large businesses had underpaid £7 billion and medium-sized businesses £3.9 billion.

The tax gap for Income Tax, National Insurance and Capital Gains Tax was 4.2%. Along with VAT there has been a long-term downward trend in the Corporation Tax gap. This has reduced from 12.4% in 2005/06 to 7.4% last year.

It appears that the days of large tax avoidance schemes have passed and HMRC is now concentrating on compliance mistakes and routine errors. HMRC is also increasingly challenging legal interpretations of tax law in order to recover more tax. Please see here for further details on HMRC’s approach.

What causes the tax gap?

The behaviour giving rise to the gap are as follows:

£5.9 billion – failure to take reasonable care
£5.4 billion – criminal attacks
£5.3 billion – legal interpretation
£5.3 billion – evasion
£3.4 billion – non-payment
£3.2 billion – error
£3.2 billion – hidden economy
£1.7 billion – avoidance

VAT – The Partial Exemption Annual Adjustment

By Marcus Ward 8 May 2018

What is the annual adjustment? Why is it required?

An annual adjustment is a method used by a business to determine how much input tax it may reclaim.

Even though a partly exempt business must undertake a partial exemption calculation each quarter or month, once a year it will have to make an annual adjustment as well.

An annual adjustment is needed because each tax period can be affected by factors such as seasonal variations either in the value supplies made or in the amount of input tax incurred.

The adjustment has two purposes:

to reconsider the use of goods and services over the longer period; and
to re-evaluate exempt input tax under the de minimis rules.

A MWCL explanation of the Value Added Tax Partial Exemption rules is available here

Throughout the year

When a business makes exempt supplies it will be carrying out a partial exemption calculation at the end of each VAT period. Some periods it may be within the de minimis limits and, therefore, able to claim back all of its VAT and in others there may be some restriction in the amount of VAT that can be reclaimed. Once a year the business will also have to recalculate the figures to see if it has claimed back too much or too little VAT overall. This is known as the partial exemption annual adjustment. Legally, the quarterly/monthly partial exemption calculations are only provisional, and do not crystallise the final VAT liability. That is done via the annual adjustment.

The first stage in the process of recovering input tax is to directly attribute the costs associated with making taxable and exempt supplies as far as possible. The VAT associated with making taxable supplies can be recovered in the normal way while there is no automatic right of deduction for any VAT attributable to making exempt supplies.

The balance of the input tax cannot normally be directly attributed, and so will be the subject of the partial exemption calculation. This will include general overheads such as heating, lighting and telephone and also items such as building maintenance and refurbishments.

The calculation

Using the partial exemption standard method the calculation is based on the formula:

Total taxable supplies (excluding VAT) / Total taxable (excluding VAT) and exempt supplies x 100 = %

This gives the percentage of non-attributable input VAT that can be recovered. The figure calculated is always rounded up to the nearest whole percentage, so, for example, 49.1 becomes 50%. This percentage is then applied to the non-attributable input VAT to give the actual amount that can be recovered.

Once a year

Depending on a businesses’ VAT return quarters, its partial exemption year ends in either March, April, or May. The business has to recalculate the figures during the VAT period following the end of its partial exemption year and any adjustment goes on the return for that period. So, the adjustment will appear on the returns ending in either June, July, or August. If a business is newly registered for VAT its partial exemption “year” runs from when it is first registered to either March, April or May depending on its quarter ends.

Special methods

The majority of businesses use what is known as “the standard method”. However, use of the standard method is not mandatory and a business can use a “special method” that suits a business’ activities better. Any special method has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a special method no rounding of the percentage is permitted and it has to be applied to two decimal places.

Commonly used special methods include those based on staff numbers, floor space, purchases or transaction counts, or a combination of these or other methods.

However, even if a business uses a special method it will still have to undertake an annual adjustment calculation once a year using its agreed special method.

De minimis limits

If a business incurs exempt input tax within certain limits it can be treated as fully taxable and all of its VAT can be recovered. If it exceeds these limits none of its exempt input tax can be recovered. The limits are:

£625 per month on average (£1,875 per quarter or £7,500 per annum) and;
50% of the total input VAT (the VAT on purchases relating to taxable supplies should always be greater than the VAT on exempt supplies to pass this test)

The partial exemption annual adjustments are not errors and so do not have to be disclosed under the voluntary disclosure procedure. They are just another entry for the VAT return to be made in the appropriate VAT period.

Conclusion

If a business fails to carry out its partial exemption annual adjustment it may be losing out on some input VAT that it could have claimed. Conversely, it may also show that it has over-claimed input tax. When an HMRC inspector comes to visit he will check that a business has completed the annual adjustment. If it hasn’t, and this has resulted in an over-claim of input VAT, (s)he will assess for the error, charge interest, and if appropriate, raise a penalty. It is fair to say that partly exempt businesses tend to receive more inspections than fully taxable businesses.

VAT: Longer prison sentences for tax fraud

By Marcus Ward 16 April 2018

The latest figures from the Ministry of Justice show that for fraud offences including; VAT, Excise Duty, and Custom Duty the average length of custodial sentences has increased by around 25%. The average sentence is now four years one month, up from three years three months as the government clamps down on tax evasion.

Why longer in jail?

It is thought that the reasons for this are that:

HMRC is demanding longer sentences
HMRC is pursuing an increasing number of suspected fraudsters
HMRC is devoting more resources to carrying out investigations
CPS has been pushing for tax frauds to be considered as a more serious offence (which, obviously, carry longer sentences).

Criminal prosecution has also increased enormously as a result of the Revenue and Customs Prosecutions Office being incorporated with the CPS. HMRC is no longer just interested in getting the VAT, it wants prosecutions, the convictions….and the tax. A person criminally prosecuted for evasion does not escape paying the tax and they will be chased for it. A fraudster may be prosecuted under the Proceeds of Crime Act 2002 and the Money Laundering Act 2007.

More resources

The news comes as companies including Amazon and eBay have agreed to give their data to HMRC in an effort to crack down on VAT evasion by overseas retailers. The deal will mean the companies will provide merchant’s data to tax officials so that fraudulent trends can be spotted.

HMRC have also been using increasingly technical procedures on data which was previously unavailable to them – details here

Naming and shaming

In addition, HMRC also publish details of people who deliberately “get their tax affairs wrong”. The current list is here

What is evasion, and what is the difference between that and avoidance?

I am often asked about the distinction between avoidance and evasion. Broadly, the difference between avoidance and evasion is legality. Tax avoidance is legally exploiting the tax system to reduce current or future tax liabilities by means not intended by Parliament. It often involves artificial transactions that are contrived to produce a tax advantage. Tax avoidance is not the same as tax planning or mitigation.

Tax evasion is to escape paying taxes illegally. This is usually when a person misrepresents or conceals the true state of their affairs to tax authorities, for example dishonest tax reporting.

Technical

The relevant legislation covering the offences of fraudulent evasion of VAT is under section 72(1) of the Value Added Tax Act 1994, furnishing false information under section 72(3) and committing evasion over a period under section 72(8). Section 72(8)(b) sets out that the offence is subject to”…imprisonment for a term not exceeding seven years…”.

Summary

The message is clear; after being criticised by the Public Accounts Committee for not have a clear strategy for dealing with tax fraud and not pursuing criminal prosecution in enough cases HMRC has demonstrated that it is prepared to go after more businesses and individuals and put more resources into detecting and prosecuting fraudulent activities.

Sleep tight

We always recommend full disclosure to HMRC, it is preferable to sleep at night (rather than trying to sleep in a prison cell). Of course, the very best course of action is not to commit tax fraud…

VAT Inspections – How do HMRC choose who to visit?

By Marcus Ward 13 April 2018

Big Brother is watching you…

It always used to be the case that “Control Visits” aka VAT inspections were decided by a business’s

turnover
VAT complexity
business complexity
structure
compliance history
previous errors

The more ticks a business gets the more inspections it will receive. Consequently, a business with a high turnover (a “Large Trader”) with many international branches providing complicated financial services worldwide which has failed to file returns by the due date and has received assessments in the past will be inspected almost constantly. Tick only a few of the boxes and a sole trader with a low turnover building business will still generate HMRC interest if it has received assessments in the past or is constantly late with its returns.

These visits are in addition to what is known as “pre-credibility” inspections (pre-creds). Pre-creds take place in cases where a business has submitted a repayment claim. HMRC will check whether the claim is valid before they release the repayment. These may be done via telephone, email, or in person, and may lead to a full blown inspection.

In addition, there was always a random element with inspections generated arbitrarily. The usual cycles were: six monthly, annually, three yearly, five yearly, or less frequently. On occasions, the next inspection would depend on the previous inspector’s report (they may, for instance, have recommended another inspection after a future event has occurred).

The Connect System

Although elements of the above “tests” may still apply, many inspections now are based on intelligence obtained from many sources. The main resource is a data system which HMRC call “Connect”. This system feeds from many bases and forms the basis of many decisions made by HMRC. Instead of HMRC relying on information provided by businesses on VAT returns, Connect draws on statistics from myriad government and corporate sources to create a profile of each VAT registered business. If this data varies from that submitted on returns it is more likely that that business will be inspected. As an example: HMRC obtains anonymised information on all Visa and MasterCard transactions, enabling it to identify areas of likely VAT underpayments which it can then target further. Other sources of information are: Online marketplaces – websites such as eBay and Gumtree can be accessed to identify regular traders who may not be VAT registered.

The Connect system can also examine public social media account information, such as; Twitter, Facebook and Instagram using sophisticated mechanisms along with being able to access individual’s digital information such as web browsing and emails.

It is understood that less than 10% of all inspections are now random.

The £100 million plus Connect project is, and will be, increasingly important as HMRC is losing significant resources; particularly well trained and experienced inspectors. With many local VAT offices closing there is also a concern on the ground that a lot of “local knowledge” of businesses has been lost.

Big Brother really is watching you…. And if you are on the receiving end of an inspection, there is a circa 90% chance that there is a reason for it!

For information on how to survive a VAT inspection, please see here

I always suggest that if notification of an impending inspection is received a pre-visit review is undertaken to identify and deal with any issues before HMRC arrive and levy penalties and interest.

VAT – What is Reasonable Care?

By Marcus Ward 12 April 2018

What is reasonable care and why is it so important for VAT?

HMRC state that “Everyone has a responsibility to take reasonable care over their tax affairs. This means doing everything you can to make sure the tax returns and other documents you send to HMRC are accurate.”

If a taxpayer does not take reasonable care HMRC will charge penalties for inaccuracies.

Penalties for inaccuracies

HMRC will charge a penalty if a business submits a return or other document with an inaccuracy that was either as a result of not taking reasonable care, or deliberate, and it results in one of the following:

an understatement of a person’s liability to VAT
a false or inflated claim to repayment of VAT

The penalty amount will depend on the reasons for the inaccuracy and the amount of tax due (or repayable) as a result of correcting the inaccuracy.

How HMRC determine what reasonable care is

HMRC will take a taxpayer’s individual circumstances into account when considering whether they have taken reasonable care. Therefore, there is a difference between what is expected from a small sole trader and a multi-national company with an in-house tax team.

The law defines ‘careless’ as a failure to take reasonable care. The Courts are agreed that reasonable care can best be defined as the behaviour which is that of a prudent and reasonable person in the position of the person in question.

There is no issue of whether or not a business knew about the inaccuracy when the return was submitted. If it did, that would be deliberate and a different penalty regime would apply, see here It is a question of HMRC examining what the business did, or failed to do, and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances.

Repeated inaccuracies

HMRC consider that repeated inaccuracies may form part of a pattern of behaviour which suggests a lack of care by a business in developing adequate systems for the recording of transactions or preparing VAT returns.

How to make sure you take reasonable care

HMRC expects a business to keep VAT records that allow you to submit accurate VAT returns and other documents to them. Details of record keeping here

They also expect a business to ask HMRC or a tax adviser if it isn’t sure about anything. If a business took reasonable care to get things right but its return was still inaccurate, HMRC should not charge you a penalty. However, If a business did take reasonable care, it will need to demonstrate to HMRC how it did this when they talk to you about penalties.

Reasonable care if you use tax avoidance arrangements*

If a business has used tax avoidance arrangements that HMRC later defeat, they will presume that the business has not taken reasonable care for any inaccuracy in its VAT return or other documents that relate to the use of those arrangements. If the business used a tax adviser with the appropriate expertise, HMRC would normally consider this as having taken reasonable care (unless it’s classed as disqualified advice)

Where a return is sent to HMRC containing an inaccuracy arising from the use of avoidance arrangements the behaviour will always be presumed to be careless unless:

The inaccuracy was deliberate on the person’s part, or
The person satisfies HMRC or a Tribunal that they took reasonable care to avoid the inaccuracy

* Meaning of avoidance arrangements

Arrangements include any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable). So, whilst an arrangement could contain any combination of these things, a single agreement could also amount to an arrangement. Arrangements are `avoidance arrangements’ if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes of the arrangements.

NB: We at Marcus Ward Consultancy do not promote or advise on tax avoidance arrangements and we will not work with any business which seeks such advice.

Using a tax adviser

If a business uses a tax adviser, it remains that business’ responsibility to make sure it gives the adviser accurate and complete information. If it does not, and it sends HMRC a return that is inaccurate, it could be charged penalties and interest.

None of us are perfect

Finally, it is worth repeating a comment found in HMRC’s internal guidance “People do make mistakes. We do not expect perfection. We are simply seeking to establish whether the person has taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances…”