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VAT Fraud in the Supply Chain

VAT Fraud in the supply chain

The REC has recently reported that there is evidence that HMRC is now focusing on VAT fraud in the supply chain and is increasing the number of companies it investigates. The investigations are expanding to encompass the Criminal Finances Act 2017, which includes the offence of failure to prevent the facilitation of tax evasion by third parties or staff.

Recruitment agencies and hiring businesses that rely on umbrella companies or other payroll partners to pay workers are at particular risk of prosecution by HMRC. If the supply companies are involved in tax evasion, the burden of proof is on the Director of the agency to ensure that they can show that they have taken reasonable steps to prevent people in the supply chain from facilitating tax evasion, and they must be able to demonstrate that their control framework at least minimised the likelihood of facilitation occurring.

The Kittel Principle

The Kittel case was a case taken to the European Court of Justice (ECJ) by the Belgian government, in 2006, against Axel Kittel (representing Ang Computime), arguing that they had knowingly participated in ‘carousel’ fraud. The ECJ finding was that Kittel knew or should have known that they were participating in a transaction connected with fraudulent evasion of VAT.

The Kittel Principle can be summarised into three questions:

  1. Was there fraudulent evasion of VAT?
  2. Was the transaction ‘connected with’ that fraudulent evasion of VAT?
  3. Did the taxable person, when he entered into the transaction, know, or should he have known that it was ‘connected with fraudulent evasion of VAT’? (1)

HMRC further states that “the ECJ judgement in Kittel does not define what is meant by ‘knew or should have known’.” and they do not give specific guidance on this.

What happens if you are prosecuted?

If you are prosecuted and found to not have carried out any appropriate preventative measures, HMRC can remove your Gross Payment Status and can even deregister your Company for VAT.

HMRC have also begun to use s69 of the VAT Act 1994 to issue civil penalties to companies, which in certain cases, can be transferred to the officers of the Company if they deem them to be culpable.

The great news is that Riddingtons has a wealth of knowledge and experience in this area. We can advise you on the policies, training and testing procedures needed to be able to demonstrate that you have done everything you can to minimise the risk. Secondly, if you place your Limited Company subcontractors with us, we can undertake all the necessary due diligence required.

If you need further information or wish to discuss any of these points raised, please feel free to contact us.


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