28 of September HM revenue and Customs (HMRC) published consultation about new penalties regime for participation in VAT fraud. If the government decides to proceed it will be included in Finance Bill 2017. Based on HMRCHMR experience the vast majority of customers meet their obligations. Penalties are only applied to a small minority of taxpayers. The penalty regime has to encourage compliance and prevent non-compliance. There is no objective to raise revenue with penalties. Penalties should be proportionate to the offence and may take into account past behaviour however consistent and standardised approach has to be applied. Penalties are designed in the way that compliant customers are in a better position than the non-compliant customers therefore penalties have to be a real threat.
In application of penalties its being seen by HMRC as difficult to separate evidence of ‘knowledge’ from evidence that the business ‘should have known’ of a connection with VAT fraud. Therefore in majority of the cases HMRC issue a decision covering both eventualities. Civil penalties legislation (Schedule 24 of FA2007) operates however on a different basis. This requires HMRC to decide, when issuing the penalty, whether the business’s non-compliance is “deliberate” or “careless”. This determines the level of the penalty. Therefore HMRC cannot choose a combined careless and deliberate penalty. As this cause difficulties the aim of the HMRC is not to do any distinction in the future.
Currently penalties can only be levied on company officers, where there’s evidence of deliberate behaviour. If however the proposal of HMRC will be accepted penalties will apply to company officers that have only been found to be careless i.e. in knowledge principle terms they should have known that their transactions were connected with VAT fraud. Distinguishing between careless and deliberate behaviour in the context of participating in fraudulent supply chains might be very difficult however the new suggestion not to differentiate will lead to higher administration, higher costs for the company, more risk for private individuals. So the burden of the work will be shifted from Tax Authority to Tax Payers. Its not to be forgotten that we are talking about very small group where the vast majority will be punished by further compliance work for the minority. For me its questionable if this is the right way to move and to criminalise professionals who were just “careless”.
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