VAT fraud continues and increasingly legitimate businesses are paying the price
10 October 2023
VAT fraud comes in many forms, but the most lucrative scheme (for fraudsters) has been coined missing trader fraud. In its simplest form, a VAT-registered fraudster buys goods or services VAT-free then charges VAT on the sale of these goods or services to legitimate UK businesses that are also VAT-registered. However, the VAT charged on the sale is never paid to HMRC, instead it is siphoned off by criminal gangs.
HMRC has deployed significant man-hours to identify fraudsters involved in this activity. Last week, HMRC announced that it had clawed back £2.1m from convicted VAT fraudsters by selling one of their properties, recovering a total of £10m in this case. Unfortunately, fraudsters are very experienced at evading investigation and so these investigative measures have been enhanced by a variety of legislative tools to try to address the issue. This often means that legitimate businesses pay the price for the fraudsters’ activity.
Most significantly, HMRC has powers to refuse businesses the right to recover VAT they’ve claimed on purchases that are linked to fraud if they feel the business should have known its supplier was a fraudster, a test established in the Kittel case in 2006 that is still applied by the courts today.
So, over 15 years after the Kittel decision, is VAT fraud decreasing? Unfortunately, according to figures provided by HMRC to RSM UK, the number of appeals by businesses refused the right to recover VAT by HMRC applying the Kittel principle doubled between 2020 and 2022. Of course, these figures could be interpreted in a number of different ways. Either VAT fraud is on the rise, or HMRC is more actively seeking financial redress from businesses that at best should have known their suppliers were involved in fraud (as it seems unlikely that a business colluding with a fraudster would wish to go to court).
As fraudsters continue to operate in the technology, telecommunications, recruitment and construction businesses it is critical that businesses in these sectors take note of these findings. Only by conducting (and documenting) thorough supplier due diligence processes can these businesses prevent any risk of an HMRC assessment.
HMRC has deployed significant man-hours to identify fraudsters involved in this activity. Last week, HMRC announced that it had clawed back £2.1m from convicted VAT fraudsters by selling one of their properties, recovering a total of £10m in this case. Unfortunately, fraudsters are very experienced at evading investigation and so these investigative measures have been enhanced by a variety of legislative tools to try to address the issue. This often means that legitimate businesses pay the price for the fraudsters’ activity.
Most significantly, HMRC has powers to refuse businesses the right to recover VAT they’ve claimed on purchases that are linked to fraud if they feel the business should have known its supplier was a fraudster, a test established in the Kittel case in 2006 that is still applied by the courts today.
So, over 15 years after the Kittel decision, is VAT fraud decreasing? Unfortunately, according to figures provided by HMRC to RSM UK, the number of appeals by businesses refused the right to recover VAT by HMRC applying the Kittel principle doubled between 2020 and 2022. Of course, these figures could be interpreted in a number of different ways. Either VAT fraud is on the rise, or HMRC is more actively seeking financial redress from businesses that at best should have known their suppliers were involved in fraud (as it seems unlikely that a business colluding with a fraudster would wish to go to court).
As fraudsters continue to operate in the technology, telecommunications, recruitment and construction businesses it is critical that businesses in these sectors take note of these findings. Only by conducting (and documenting) thorough supplier due diligence processes can these businesses prevent any risk of an HMRC assessment.
