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HMRC internal manual

Civil evasion penalties for Customs, Excise and VAT

Civil evasion penalties for Customs, Excise and VAT: who is liable

Liability may be attributed to

  • an individual
  • a legal entity such as a partnership or limited company.

Limited Companies

Generally speaking, as a matter of law, actions of a single individual can be attributed to the company as a whole. This was a matter considered in the case of McNicholas Construction Co Ltd v C&E Commissioners (2000) STC 553.

This case is authority for the proposition that the acts and knowledge of all employees who have a part to play in the making and receiving of supplies may be attributed to the employer company for the purpose of a penalty for dishonest evasion; and that the purpose of the legislation would be seriously undermined if the only persons whose acts and knowledge might be attributable to a company were those responsible for running its affairs and those involved in its VAT affairs. However, there is an exception to the rule quoted in this case: “The exception to the general rule of attribution was founded in common sense and justice. The act of an employee should not be attributed to the employer company if, in truth, the act was directed at, and harmful to, the interests of the company.”

Limited companies which have been dissolved and struck off the register of companies at Companies House are no longer in existence and can have no liability to a Section 60 penalty.

The same principles apply, for the most part, to LLPs. However, the insolvency regime applied to LLPs has been modified and is complicated. It is recommended that all enquiries in relation to LLPs regarding actual or potential insolvency should be addressed to Criminal & Enforcement Policy, 100 Parliament Street, London SW1 2BQ.

However, where a company is in liquidation it is not excluded automatically from liability to a civil penalty. In order to maintain this position, in cases where a company has already gone into liquidation at the outset of our compliance check, or is liquidated during the course of the check, it is essential that you monitor the position with the insolvency practitioner to ensure that the penalty notices are served (via the insolvency practitioner) before the company is struck off. Prior to a company being dissolved, HMRC can object to its dissolution by applying to the Dissolution Unit, Companies House, Crown Way, Maindy, Cardiff, CF4 3UZ, setting out in writing the grounds for the objection. Companies House will inform HMRC in writing whether or not they have suspended their action. The objection must be made before the company is dissolved, as once dissolved, removal from the register is automatic.

In order to pursue civil offence action against a limited company that has been struck off (for the purpose of recovering the penalty debt from the dishonest former directors and/or managing officers) the company would first have to be reinstated to the Register of Companies. This process is complex and costly and should only be considered in exceptional circumstances.

Partnerships

In the case of common law partnerships, a dishonest partner usually binds the whole partnership to liability to a civil evasion penalty. It is the partnership, therefore, that is generally assessed the penalty - not just the dishonest partner or partners. The partners in the partnership will be jointly and severally liable to pay the penalty.

See Section 45 of the VAT Act 1994 and Akbar t/a Mumtaz Paan House v. C&E (1996) UKVAT No. 15386, upheld on appeal at [2000] STC 237, Ch.D. per Dyson J; Islam and Others v. C&E (2002) UKVAT No. 17834; and Uddin & Anor (t/a Ringmer Tandoori Restaurant) v Customs and Excise (2005) UKVAT V19043.

The provisions in relation to ordinary partnerships should be distinguished from the case of limited liability partnerships (‘LLPs’). LLPs are functionally equivalent to limited companies for the vast majority of purposes. Civil penalties should generally be imposed only on the LLP itself, and not on the individual members as well. The power to recover a portion or whole of a S60 penalty from a managing member should only usually be exercised if the criteria for the imposition of a Section 61 notice on that member are met.

In accordance with the Interpretation Act 1978, ‘person’ includes a body of persons corporate or unincorporate. Solicitors’ Office advice (see Standard Chartered Bank v Pakistan National Shopping [2003] AC 959 & Abu Dhabi Investment Co. v H. Clarkson & Co. Ltd [2007] EWHG 1267) is that a person liable under Section 60 can therefore potentially be any form of legal entity or natural person, so long as he does or omits to do an act for the purposes of evading VAT and in doing so, he knew or ought to have known that would be the result of his actions. However, in the case of bodies corporate, which includes limited liability partnerships (‘LLPs’), limited companies and corporate bodies established under statute, Section 61 of the VAT Act 1994 refers to the power to recover payment of a S60 penalty from directors and managing officers where it can be shown that the conduct giving rise to the penalty is attributable to their dishonesty. For guidance on when and how a penalty should be apportioned to directors and managing officers you should refer to CEP1450. In the case of LLPs, Section 61 will be applied to the members who carry on the function of management of the business, in accordance with Section 61(6) of the VAT Act 1994.

Deceased persons

It is HMRC’s policy not to issue an excise civil evasion penalty against deceased persons.