Could you identify VAT fraud across your supply chain

Background

Recent research undertaken by HM Treasury shows an 8.5 per cent tax gap across VAT, equating to a £12.3bn yearly loss for the Exchequer. VAT is the largest contributor, with over a third of the UK’s total tax gap.

Fraud and a failure to account for VAT is evidently widespread. Perhaps this is unsurprising given its complexities and its self-declaratory nature. Charities exist in one of the more complex areas of VAT accounting, so increasing their exposure.

To reduce this tax gap, HMRC is looking harder at measures across the wider supply chain to move risk and help it to ‘police’ the collection of VAT.

For example, the recently introduced Domestic Reverse Charge puts the responsibility for accounting for their customer’s VAT on the purchaser of qualifying building work.

Furthermore, HMRC also has new powers, courtesy of the Criminal Finances Act 2017 aka the Corporate Criminal Offence, which introduced the new offence including a failure to prevent the facilitation of tax evasion by third parties or staff.

Charities with good tax management have suitable processes to identify where risks exist; not just within their own organisation, but across their supply chains.

Table

Maintaining good processes

Having good controls will reduce the risk of fraud from within or without your organisation. They will also provide HMRC with greater comfort that, should any instance of fraud occur, it was isolated and unlikely to require further investigation.

So how do you know if you have good controls? The answer is commonly determined by testing your current processes and analysing how mistakes happened.

We often find some of the main hurdles to improving controls include a number of misconceptions, including:

Apathy

• We’ll look at our processes, but only if a problem arises
• We don’t pay much tax so it’s not a concern

Denial

• We haven’t identified any VAT errors, so we haven’t made any
• We’re a charity, HMRC will let us off

Familiarity

• We have a small, experienced, finance team who manage all our tax
• We have a tax adviser so we must have good controls

Cost

• We’re a charity and so can’t afford to make improvements
• There’s no immediate financial return on investing in our tax processes

The risks

The consequences of tax fraud can vary from relatively minor, through to undermining a charity’s ‘going concern’ status. Broadly, the types of risk can be categorised as follows:

Financial loss: VAT fraud can result in significant financial cost, including HMRC withdrawal of recoverable VAT, output tax assessments and civil penalties of up to 100% of the tax liability (additional to the tax due).

HMRC risk rating: Instances of fraud, whether perpetuated by your organisation, your employees or where your organisation is simply the victim, can result in HMRC increasing your company’s risk rating. Being subject to an HMRC Business Risk Review is usually an onerous exercise involving HMRC testing a wide range of your tax processes. The reviews are an administrative burden and can often result in HMRC identifying shortfalls resulting in new assessments and requiring the charity to adopt better controls. All this can be a significant resourcing distraction to running your organisation.

Prosecution: Where HMRC suspects that a person is knowingly involved in or the fraudulent evasion of VAT (or planning to be) HMRC can start a criminal prosecution. Deliberately evading VAT is an offence under section 72(1) of the 1994 Value Added Tax Act, and the maximum penalty is seven years’ imprisonment and an unlimited fine.

Under the Criminal Finances Act 2017 penalties are unlimited, and prosecutions can be made public, risking significant reputational damage and adverse publicity.

Summary

With HMRC’s new powers, it is important that your organisation takes steps now so that it doesn’t facilitate tax evasion. This is likely to mean a risk assessment of your main activities and organisational structure, including any risk exposure you may have through your customers and suppliers.

Under the Corporate Criminal Offence rules your only defence is to show that reasonable steps were taken to prevent your associated persons from facilitating tax evasion in the supply chain. These steps may not have prevented tax evasion, or event the facilitation of it, but you must be able to demonstrate that your control framework at least minimised the likelihood of facilitation occurring.

The first step is to review the controls you have in place, ensuring that they are up-to-date and identifying any improvements that can be made.

The second step is to ensure that the controls are actually being followed. This can be achieved with policies, training, testing and periodic updates to the organisation.

RSM can provide help and advice to your organisation on the effectiveness of its reasonable tax evasion prevention measures. For further information, please contact Scott Harwood.