If a business knew or should have known that it was part of a fraudulent supply chain, HMRC can impose a penalty on the business.
When applying the knowledge principle to individual cases, it is difficult for HMRC to separate evidence of ‘knowledge’ from evidence that the business ‘should have known’ of a connection with VAT fraud. So in most instances, HMRC issues a decision covering both eventualities.
However, the relevant civil penalties legislation (Sch 24, Finance Act 2007) operates on a different basis and requires HMRC to decide, when issuing the penalty, whether the business’ non-compliance is ‘deliberate’ (actual knowledge of the fraud) or ‘careless’ (should have known of the fraud). This determines the level of the penalty.
The Government will legislate in Finance Bill 2017 to introduce a new penalty for participating in VAT fraud, to be implemented after Royal Assent. The new penalty will be a fixed rate of 30% for participants in VAT fraud.
The new penalty will be applied to businesses and company officers who knew or should have known that their transactions were connected with VAT fraud.