New penalties boost HMRC’s VAT evasion revenue

Tuesday 22 October 2013

HMRC’s investigations into VAT evasion by large companies pulled in record revenues last year as new powers to enforce tougher penalties began to bite, according to figures obtained by Pinsent Masons.

The tax authority bagged a total of £1.44 billion in the 2012-13 financial year from scrutinising major firms’ VAT arrangements, the legal firm says, representing a striking increase of 18 per cent from the previous year. It continues a trend which has been ongoing for some time, too, as last year’s revenues were more than three times the amount pulled in from similar activity in 2009-10.

Darren Mellor-Clark, VAT and indirect tax expert at Pinsent Masons, says that additional powers granted to HMRC before last year contributed to the dramatic increase. The tax authority can now charge additional fines to companies that the department perceives as uncooperative with its investigations. With levies amounting to anything from 30 to 100 per cent of the total revenue believed lost, depending on whether or not missed payments were deliberate or information was concealed, it is easy to see how HMRC’s coffers have swollen.

“Depending on how serious investigators decide the infraction is, businesses can see their VAT bills double when penalties are included,” Mr Mellor-Clark said.

“With HMRC still under pressure to increase its overall tax take, these penalties can be a vital top-up for the tax authority.”

The department has come under mounting pressure from both the public and the government to increase its receipts through compliance activities, especially in the wake of scandals surrounding multinationals such as Amazon and Starbucks that were criticised for paying relatively low levels of tax. As members of the public have launched campaigns to boycott these organisations, the government has sought to toughen its stance on tax avoidance and evasion. Contractors and other small businesses have felt the consequences of this shift in attitude as well as larger companies.

In its quest to reclaim revenues lost as a result of offshore tax avoidance schemes, HMRC has launched tax information exchanges with territories such as the Channel Islands and Cayman Islands. It has also established disclosure facilities allowing taxpayers with assets held in these jurisdictions to come forward and settle any outstanding tax bills.

VAT is one of the most significant targets when it comes to businesses, as HMRC has sought to clamp down on traders that import VAT-free products, charge the tax on their side, and then fail to pass the funds on to HMRC before they disappear. Pinsent Masons says that in “carousel fraud”, goods are recycled through a supply chain to trigger multiple VAT repayments from the tax authority even though the products were free of the tax when they were originally bought.

Under the current rules, HMRC can refuse to pay back VAT charges on a product if they believe the buying business should have been aware they were involved in a fraudulent transaction - which Pinsent Masons says means the taxman does not have to chase the criminals. But the tax authority is now preventing legitimate businesses from reclaiming the payments, the law firm says, to encourage them to check on their suppliers.

“While few would disagree that it is important that HMRC does as much as possible to prevent carousel fraud, aggressively cracking down on unwitting parties that are involved - often through no fault of their own - is, for some observers, a controversial method to increase VAT yield,” Mr Mellor-Clark added.

By Victoria McDonnell

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