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Taxman chasing you for supplier fraud? Here's what to do

Evan Wright

If HMRC attempts to recover someone else’s VAT default from your business, there are several things to do and to remember, Evan Wright explains.

Construction companies are supplied with many different types of goods provided by suppliers.

Let’s say you issue VAT invoices to your customers and pay VAT to suppliers promptly and correctly, while undertaking credit checks to make sure you know who you are trading with. You collect trade references for new suppliers and you obtain VAT verification from HMRC. You might even visit a new supplier to ensure they exist and trade in the goods you need.

You also account to HMRC correctly in respect of the input/output VAT.

Although you are doing everything that HMRC asks of you, it suddenly pays you a visit and serves a VAT Notice 726 amid talk of Missing Trader Intra-Community Fraud (MTIC) and a ‘VAT defaulter’.

You respond by proving that you collect and pay VAT as required, with full disclosure of your financial information. However, there has been a serious VAT loss somewhere along your supply chain because of a ‘defaulting trader’.

HMRC references a schedule of invoices issued by one or more of your suppliers without telling you where the VAT loss occurred or even how much it was. 

Despite fully co-operating, you are then served with a letter that includes the following phrasing: “The fact that this notification of tax loss letter has been issued to you does not limit HMRC’s right to deny input tax in respect of these transactions if […] it is established that you knew or should have known that you were participating in a supply chain connected with the fraudulent evasion of VAT.

“You should satisfy yourself that you have undertaken sufficient due diligence […] of your suppliers and customers, and of the underlying supply chains. It is your responsibility to determine which checks to carry out and whether to undertake transactions in light of the results of those checks.”

Furthermore, if you trade in goods referred to as “specified” for the purposes of the regulations, HMRC might talk to you about how the company and/or its directors may be held personally “jointly and severally liable” for the loss.

Somebody else’s VAT default

In essence, this means HMRC is trying to recover someone else’s VAT default from you.

To combat this, you will need to argue that you did not know and should not have known that your company was participating in a supply chain resulting in a fraudulent loss, even though the burden of proof rests strictly with HMRC.

Defending the allegation does not simply involve supplying HMRC with copies of the due diligence enquiries. HMRC will look at what the company and its directors knew or ought to have known about each transaction.

It can be difficult to compile all of the information and arguments your company requires to convince HMRC that you should not be their target in the recovery of someone else’s fraudulent VAT default.

I have become involved in HMRC visits relating to Notice 726 at different stages of the process. From the outset, companies will have likely implemented quite a few of the checks suggested in Notice 726, and HMRC’s visit is designed to test compliance with factors in the notice, as well as the company’s ability to pay a penalty in respect of the tax loss.

A visit from HMRC can highlight a shortfall in procedures, and you may want to implement additional measures after the visit to protect against future problems. It is therefore in a company’s best interest to implement the relevant Notice 726 checks from the outset.

If an internal review reveals real concerns about a supplier of previous supplies, you should obtain legal advice on whether those concerns should be disclosed to HMRC.

All companies are concerned about the cost of involving lawyers when HMRC engage in this way. However:

  • The cost of a lawyer is small than the cost of an adverse decision.
  • HMRC does not normally pursue small amounts in cases of this type.
  • A lawyer should set out anticipated costs in stages and should define exactly what those costs cover.
  • Costs need to be realistic when compared with what the costs are designed to achieve.
  • Companies should negotiate costs and rates with the lawyer. It may, for example, be possible to use more junior lawyers for some tasks or to offer fixed fees.
  • A lawyer’s costs may be covered by the company’s insurance policy. Indeed, the terms of the policy probably require the company to notify its insurer of HMRC’s involvement. 
  • Insurers may direct the matter to a solicitor’s firm appointed to their own panel. The panel firm may or may not be a specialist in the relevant area of law. However, the insurer will often agree to the appointment of a firm chosen by you, especially if your chosen firm demonstrates the necessary expertise and is willing to work in accordance with panel terms.

Main takeaways

If HMRC gets in touch, do not assume that you can start thinking about the issues at the meeting itself.

Preparation is key. Do not say something to HMRC for the sake of saying something. HMRC increasingly shares information between its various departments and something you think is insignificant can be the opposite to the department across the corridor.

Written representations also require careful thought; it is extremely difficult for a company with no experience of tribunal proceedings to anticipate what correspondence should and should not say.

A well-drafted submission can discourage or prevent HMRC from proceeding beyond the report arising out of the meeting. It can often avoid tribunal proceedings and can sometimes assure HMRC that, in fact, your company does not need to be monitored in the longer term.

Evan Wright is corporate compliance partner at JMW Solicitors

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