Basic VAT fraud arises when a business dishonestly fails to charge and account for VAT when they should have done so, or VAT is charged but not paid over to HMRC.
This behaviour can result in criminal investigation and prosecution.
Complex VAT fraud includes missing trader or carousel fraud.
Carousel fraud is quite common and involves the following steps:
- Companies in the UK and other European Union countries are controlled by the fraudsters.
- Company A in the EU sells goods free of VAT to Company B in the UK.
- Company B sells the goods on to Company C also in the UK and charges 20% VAT and then disappears, owing the 20% tax to HMRC.
- Company C sells the goods to Company D in the EU and claims back the 20% VAT from HMRC.
- Company D then begins a further cycle by selling the goods to Company E in the UK.
If this occurs, and HMRC can show that you knew or should have known that your transactions were connected to missing trader or carousel fraud, then you may lose your entitlement to claim the input tax linked to those transactions. Worse, you may be charged a penalty under section 69C of the Value Added Tax Act 1994 of 30% of the lost VAT and also be assessed for the VAT.
A company director may also be made liable to pay the company’s penalty if they knew or should have known that its transactions were connected with VAT fraud. The actions of the company which gave rise to that penalty are then attributable to the director.
If you are prosecuted and convicted of VAT evasion, sentencing can be as follows:
- In a Magistrates court, the maximum sentence is six months in jail or a fine up to £20,000 or three times the VAT, whichever is the greater.
- In Crown court cases, a maximum of seven years in prison or an unlimited fine.
Also in connection with VAT fraud, the offence of failing to prevent the facilitation of tax evasion means that companies and firms which fail to prevent representatives acting on their behalf from facilitating tax evasion can be prosecuted. If found guilty, they can be subject to an unlimited fine.