The HM Revenue and Customs (HMRC) is becoming increasingly vigilant in investigating and preventing fraudulent value-added tax (VAT) refund applications. Despite this increased vigilance, the UK still loses nearly £1 billion per year due to VAT fraud.
When the HMRC detects indications of fraudulent activity, due to a carousel fraud scheme or other MTIC fraud scheme, the VAT claim will be subjected to the Extended Verification Process (EVP). VAT refund claims put under the EVP have increased significantly since 2011, reversing a previously declining trend.
Why is VAT fraud increasing?
Tax experts speculate that VAT fraud has increased due to the rise in UK VAT to 20% in January 2011. This high VAT rate makes the UK a more financially valuable platform to illegally exploit VAT loopholes than in other EU states.
HMRC is aware of this potential for increased profitability to fraudsters, and therefore the number of EVPs has increased. Consequently the length of time for an EVP to complete has, in turn, increased.
Thus even honest firms with legitimate VAT refund claims might expect extended wait times for VAT refunds.
What might happen if a business is subjected to the EVP?
If a legitimate firm with no objectively reasonable knowledge that their supply chain is involved in fraud is subjected to the EVP, the financial repercussions can still be devastating. As VAT returns can amount to millions of pounds, even a delay in the expected reimbursement could be financially crippling.
HMRC recently lost a suit against Express Computers/Hillcraft Trading after the ‘means of knowledge’ test was not met, and the trader was cleared of any wrongdoing. Express Computers/Hillcraft Trading had £1 million withheld in returns in 2006, and only received their VAT return at the conclusion of the trial in August 2011. The financial burden caused the firm to go out of business.
This case in particular has raised questions as to whether HMRC is acting too zealously in the face of difficult to prevent VAT fraud and, in that course, disproportionately affecting honest traders with no knowledge or reason to have any knowledge of possible carousel or other VAT fraud anywhere along the supply chain.
Meeting the means of knowledge test
This increased enforcement calls for firms to ensure they can clearly meet the means of knowledge test through transparency and attentiveness to their entire trading chain. For example, a trader might be on the lookout for goods otherwise inexplicably available far below market price, as the seller never intends to pay the associated VAT costs.
This is particularly important in the light of HMRC’s crackdown. Traders must ensure they have specific knowledge of all links in the supply chain, and avoid ambiguities that might arouse suspicion in HMRC, triggering an EVP.
Get specialist legal advice
If you or your business is facing an EVP, a VAT investigation or prosecution for engaging in VAT fraud it is vital that you seek expert legal advice at the earliest opportunity. For more information call today on 01616 966 229 to speak to our serious fraud solicitors or complete an online enquiry form and a member of the team will contact you directly.