HMRC have launched a consultation ‘Penalty for participating in VAT fraud’.  This proposes a new penalty for those that knew or should have known their transactions were connected with fraud.

The consultation was originally announced at Budget 2016 and forms part of HMRC’s wider penalties review. 

Currently, where a business knows or should know that a transaction is connected with VAT fraud HMRC will:

  • Deny input VAT recovery
  • Charge penalties for an inaccurate return under Sch 24 FA 2007.

As the Sch24 penalties require a decision on whether the actions of the business were ‘careless’ (i.e. they should have known of the fraud) or ‘deliberate’ (i.e. they did know) HMRC will wait until after the fraud case is decided to issue a penalty.

The proposed new specific penalty:

  • Would be issued at the same time as the underlying fraud is addressed.
  • Does not rely on the distinction between whether the business knew, or should have known, of the fraud.

The consultation sets out two possible design options:

  • Option A: a fixed rate 30% penalty for all cases.
  • Option B: an ‘early payment system’ with a fixed 25% penalty which can be increased to 50% if, on appeal, it is found that the business had actual knowledge of the fraud.

Under both options:

  • There would be no reduction for disclosure of information to HMRC.
  • The penalty could be collected from company officers if they personally knew, or should have known, of the fraud connection.

HMRC state they are not restricted to these options, and invite alternative proposals.  They also invite comments on whether ‘naming and shaming’ would be appropriate.

The consultation runs until 11 November 2016.  If the Government decides to go ahead with a new penalty draft legislation will be published for inclusion in Finance Bill 2017.


Our subscriber guide: Penalties (VAT)

Consultation document: Penalty for participating in VAT fraud