Neil Warren reminds directors to be aware of missing trader VAT fraud, as it can lead to penalties being issued by HMRC to a company’s officers to pay personally.
When might a company director or officer be personally responsible for a debt owed to HMRC by the company?
The answer is if the debt relates to a penalty issued against the company for a deliberate error on a tax return (either a ‘deliberate not concealed’ error, or one that is ‘deliberate and concealed’) and HMRC has used its powers to reallocate up to 100% of the penalty to the individual officers who were attributable to the errors in question (para 19, Sch 24, FA2007).
This was the power used by HMRC in the case of Stephen Bell and Paul Hovers (TC06458), who were each issued with a personal liability notice (PLN) for £89,306.
Bell and Hovers were directors of Carwood Commodities Ltd, which traded as a scrap metal dealer. HMRC accused this company of being connected to VAT missing trader fraud, ie where a supplier disappears in a supply chain, without accounting for output tax on sales invoices it has issued.
The HMRC officer disallowed input tax of £128,720 claimed by the company on its April 2013 return, and £162,881 claimed on the July 2013 return in relation to purchase invoices issued by GPSE Ltd. A penalty calculated at 61.25% of the disallowed VAT was issued as a ‘deliberate error but not concealed’ ie £178,611.
Carwood Commodities Ltd. ceased to trade on 24 December 2014 and subsequently went into liquidation. On 5 August 2015, HMRC issued a PLN to the two directors, with each being responsible for 50% of the penalty.
In cases of this nature, HMRC must show that the directors “knew or should have known” that the transactions in question were connected with the fraudulent evasion of VAT. It is insufficient to just demonstrate carelessness, the actions must be deliberate. The court noted that Hovers was “very experienced and knowledgeable of the industry and its dynamics” and that Bell was “intelligent and astute” and had 20 years’ experience in the scrap metal business.
A key issue was that Carwood Commodities had been alerted about the need to be aware of missing trader fraud, by the issue of tax loss letters, but did not seem to have applied any strong due diligence checks on its supplier GPSE Ltd. The tribunal judge commented that the due diligence checking “lacked any substance”. Taking into account a range of issues in a detailed report, the tribunal dismissed the taxpayers’ appeal.
We all enjoy a good bargain in the business world, the chance to buy goods cheaply and sell them on with a healthy profit margin. Many business people feel that such deals are important to balance out against those deals that go wrong, eg where a loss is incurred, or the customer doesn’t pay and a bad debt is incurred.
HMRC has recently updated its guidance on how to spot missing trader VAT fraud. I recommend you read that short leaflet and bear in mind my top three key tips to avoid being caught up in a fraudulent supply chain:
- If something sounds too good to be true it usually is. Beware of deals where a massive profit margin is being made without a lot of work or added value being necessary.
- It is important to properly check the status and background of all suppliers, but particularly those without a lengthy trading history. A proper system of due diligence should be in place.
- It is important that company staff and managers are aware of the potential risks of missing trader fraud, and its outcome for the business, in terms of disallowed input tax and potential penalties of up to 70% of the tax due. This percentage is the maximum penalty for an error that is ‘deliberate but not concealed’.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.