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HMRC deploys three powers to stamp out VAT fraud

HMRC used three different powers to sanction an individual for alleged VAT and excise duty fraud committed by overseas companies that they were involved with.

26th May 2020
Independent VAT Consultant
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The first tier tribunal case of Parul Malde (TC7621) was a pretty routine win for HMRC. It concerned input tax on legal fees, and whether those costs were a personal expense of Malde or a business expense of his VAT registered property business. The court agreed with HMRC that the costs were private.

The interesting issue is the powers used by HMRC to deal with the taxpayer’s supposed dishonest behaviour in relation to his alleged role as a shadow director of two overseas companies:  Sintra Global Inc and Sintra SA.

VAT and duty avoidance

The companies failed to register and pay VAT on imported goods subject to excise duty. We are talking big money here (over £43 million) and HMRC personally took action against Malde on three different counts: 

Freezing order

A freezing injunction was put in place on his personal assets for £22.75m. There were massive implications here. His representative claimed at the hearing that the injunction prevented his property business from being “operated or expanded without a variation.” 

The impact on the property assets was his main reason for claiming input tax on the legal fees charged by the lawyers defending him against the allegations. He referred to two proposed property deals that could not be carried out because of the injunction. The freezing order related to all of Malde’s personal assets, including bank accounts, vehicles and properties.

Personal Liability Notice (PLN)

There have been a few VAT tribunal cases in the past on PLNs. Where this sanction is used, any penalty imposed against a company for deliberately underpaying tax can be made a personal debt of the company officer(s). The reason for the legislation is clear: it prevents the collection of a penalty being lost with the liquidation of a company that has minimal assets. 

To impose a PLN it is necessary for HMRC to prove that the individual in question either personally gained or sought to gain financially from the evasion (see HMRC Compliance Handbook CH98550). 

Civil evasion penalty notice

The total civil penalties issued against the companies but then subject to the PLN issued against Malde exceeded £24m. These were:

  • Failure to register for VAT: £11.75m from Sintra SA. This penalty was issued on the basis that Malde was “wholly responsible for the dishonest action” of the company;
  • Penalty for “deliberate wrong doing”: £13.8m from Sintra Global Inc.

See HMRC Compliance Handbook CH90000

Conclusion

The paradox of this case was that the input tax in dispute was just over £10,000, hence why I have concentrated on the issues affecting the director, which ran into millions of pounds. The case facts illustrate the extensive powers that can be used by HMRC to deter tax evasion.

Replies (3)

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By Paul Morton
27th May 2020 10:59

Good morning

I read the above article with interest and in particular the paragraph relating to the PLN. You state: "To impose a PLN it is necessary for HMRC to prove that the individual in question either personally gained or sought to gain financially from the evasion (see HMRC Compliance Handbook CH98550)".

Whilst this is indeed what is shown in the HMRC manual it is for guidance only and is not what the legislation sates. This is at Paragraph 19 of Schedule 24 FA07 and makes no mention of this test whatsoever. The Tribunal will only go by the legislation and therefore this test is not required and the HMRC guidance is not grounds for appeal.

I'm speaking first hand about this having just retired from HMRC after 43 years and being involved in investigation work for more than 33 years.

Thanks (2)
By rbusfield
27th May 2020 15:39

It is always best to try and negotiate with HMRC before the Personal Liability Notice is issued, either negotiating a reasonable apportionment or making representations on the basis that the officers weren’t intentionally negligent or fraudulent to avoid a PLN. If representations are made to HMRC at the right time in the process a settlement can often be negotiated on a voluntary basis without a notice being issued. Rebecca Busfield (Watt Busfield)

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By rbusfield
27th May 2020 15:39

It is always best to try and negotiate with HMRC before the Personal Liability Notice is issued, either negotiating a reasonable apportionment or making representations on the basis that the officers weren’t intentionally negligent or fraudulent to avoid a PLN. If representations are made to HMRC at the right time in the process a settlement can often be negotiated on a voluntary basis without a notice being issued. Rebecca Busfield (Watt Busfield)

Thanks (0)