Guidance

Civil penalty investigations statement of practice (VAT Notice 730)

What happens when HMRC investigates your VAT affairs under the Civil Evasion Penalty Notice 730 procedure. For investigations started before 31 January 2012.

Detail

The information in this notice has been superseded by Code of Practice 9: where HM Revenue and Customs suspect fraud (COP9), for investigations started after 31 January 2012.

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1. Overview

1.1 What this notice is about

This notice explains what happens when HM Revenue and Customs (HMRC) investigate your VAT affairs under the Civil Evasion Penalty (CEP) Notice 730 procedure. It outlines both:

  • our approach to reaching an agreement with you on the nature, extent and reason for any VAT irregularities
  • how you can reduce any penalty that we may impose

In April 2002 we introduced a new approach to VAT civil evasion investigations. Section 5 of this notice explains how the approach can affect the level of penalty under the CEP Notice 730 procedure.

1.2 What’s changed

The address for sending your comments or suggestions has been updated.

1.3 Why HMRC investigate fraud

We want you to pay the right amount of tax at the right time and we will do everything we can to ensure this happens. We aim to collect the right amount of tax with any interest and penalties that may be due.

Most taxpayers do declare and pay what is due. Unfortunately, some deliberately try to pay less than is due. When we think this may have happened, we will start to investigate the matter to establish the facts.

We investigate the VAT affairs of all categories of VAT registered traders and also those that should be registered but are not.

1.4 The law covering this notice

Under Section 60 (1) of the VAT Act 1994 HMRC may impose a penalty in any case where both:

(a) for the purpose of evading tax, a person does any act or omits to take any action

(b) that person’s conduct involves dishonesty (whether or not it is such as to give rise to criminal liability)

The penalty which the law imposes is an amount equal to the tax evaded, but the Commissioners or a VAT Tribunal have the power to mitigate (reduce) the penalty as they think proper.

2. How the Notice 730 Civil Evasion Penalty (CEP) procedure works

2.1 What happens first

The investigating officer will:

  • interview you
  • explain the CEP Notice 730 procedure
  • ask you to co-operate in establishing your true VAT liability

The officer will explain why we believe the under declaration arises from dishonest conduct on your part. The interview will give you or your adviser* an opportunity to provide an explanation as to why the arrears arose. If you provide a satisfactory explanation for the discrepancy, a civil evasion penalty will not be imposed.

*If you decide to have an adviser present at the interview it does not have to be a professional adviser, that is an accountant. You are entitled to be represented by anyone you wish to be present. However we will not accept as your adviser a person who may be interviewed in connection with the same fraud.

2.2 Your co-operation

You are under no obligation to speak to the investigating officers or provide information. Any information you do provide may be used in assessing your liability to tax or to a penalty, should the evidence show that an offence has been committed. However it is a matter for you to decide whether or not you wish to provide information or respond to questions. If you are being interviewed you are free to leave at any time.

You should remember that the investigation is not being conducted with a criminal prosecution in mind. We may prosecute in the event of a false disclosure being made to the investigating officers, but will not use the information gathered in a civil investigation in a criminal prosecution of the same offence.

3. Calculation of penalties

3.1 How penalties are worked out

Any penalty that we impose will be a percentage of the tax evaded. In law, the penalty can be 100% of the agreed or alleged tax which has been under declared.

However, whilst in cases of dishonest evasion a penalty will normally be imposed, you can considerably reduce this by the actions you take during the investigation. We hope that you will agree with the officer, at an early stage, the amount of VAT which has been under declared.

3.2 How you can reduce the penalty

You can reduce the penalty significantly by promptly disclosing full details of your true VAT liability, and by the extent to which you co-operate during the whole investigation.

Disclosure

At the interview you can obtain a considerable reduction by providing an early and truthful admission of the extent of the arrears and why they arose. Of course, a wide variety of circumstances are possible. The officer has to decide how much information you gave, how soon you gave it and how it contributed towards settling the investigation.

Co-operation

You can receive a further considerable reduction if you:

  • supply information promptly
  • attend interviews
  • answer questions honestly and accurately
  • give the relevant facts to establish your true liability to VAT

The extent to which your co-operation has saved official time and resources and the extent to which co-operation was possible will be considered when applying a penalty.

You may receive no penalty reduction at all if you:

  • put off supplying information
  • avoid attending interviews
  • give untrue answers to questions
  • do nothing until formal action is taken against you
  • generally obstruct the course of the investigation

3.3 By how much the penalty can be reduced

Reductions from the penalty figure will normally be made for three reasons, to the maximum percentages specified, as follows:

(a) an early and truthful explanation as to why the arrears arose and the extent of them – up to 40%

(b) co-operation in establishing the true amounts of arrears – up to 25%

(c) attending interviews and producing records and information as required – up to 10%

Therefore, in most cases, the maximum reduction obtainable will be 75% of the underdeclared tax. In exceptional circumstances however, consideration will be given to a further reduction, for example where you have made a full and unprompted voluntary disclosure, as in a), b) and c) above.

If there are any other matters which you believe may affect the level of penalty, you should inform the officer accordingly.

4. What happens once the arrears have been established

4.1 What happens next

When the arrears have been established or agreed, you will receive an assessment notifying you of the tax arrears and any interest chargeable. Subsequently you will receive a penalty assessment and a letter showing how much mitigation has been allowed.

4.2 What happens if you can’t pay

It may be possible to pay by instalments. You will be expected to make a significant down payment, with the balance by agreed instalments over a short period.

Failure to pay may result in Civil Recovery Proceedings.

4.3 What happens if you disagree with the arrears or penalty

If you disagree with the tax assessment or penalty, you may ask the issuing office for a reconsideration of the matter. If you are not satisfied with the outcome you have the right of appeal to a VAT and Duties Tribunal.

5. The approach to the investigation of VAT civil evasion cases

5.1 Background to the approach

In April 2002 we introduced a new approach to the investigation of some VAT civil evasion cases.

The aim of the approach was for HMRC to reach an agreement with a person on the nature, extent and reason for the irregularities. This entails the person fully co-operating from an early stage and subsequently preparing a disclosure report detailing the nature of the irregularities and quantifying the arrears, which we will then verify. Any penalty imposed where there has been full co-operation would not exceed 20% of the tax evaded.

5.2 How penalties are worked out under this approach

Reductions from the 100% penalty figure will normally be made, to the maximum percentages specified, as follows:

(a) up to 40% - early and truthful explanation as to why the arrears arose and the true extent of them

(b) up to 40% - fully embracing and meeting responsibilities under this approach by, for example, supplying information promptly, including full written disclosure, attending meetings and answering questions

These may be aggregated - in most cases, therefore, the maximum reduction obtainable will be 80% of the tax under declared.

5.3 What happens if this approach isn’t used to investigate your case

In a case where this approach is not being used, we will normally undertake the investigation using the full civil evasion procedure under the terms of this Notice.

However, where you co-operate in the same way and to the same extent as required by this approach, we will use the same criteria for a reduction to the penalty as that used for the new approach.

Your rights and obligations

Read Your Charter to find out what you can expect from HMRC and what we expect from you.

Help us improve this notice

If you have any feedback about this notice please email: customerexperience.indirecttaxes@hmrc.gsi.gov.uk.

You’ll need to include the full title of this notice. Don’t include any personal or financial information like your VAT number.

If you need general help with this notice or have another VAT question you should phone our VAT Helpline or make a VAT enquiry online.

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Published 12 January 2014