Liability to a VAT civil evasion penalty: when an act of evasion takes place
For the purpose of alleging evasion under Section 60 of the VAT Act 1994, it is not a prerequisite that a VAT return has been submitted. Section 60(1) provides that, in any case where -
(a) for the purpose of evading VAT, a person does any act or omits to take any action, and
(b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability),
he shall be liable, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct.
Subsection (2) goes on to state:
The reference in subsection (1) (a) above to evading VAT includes a reference to obtaining any of the following sums-
- a refund under any regulations made by virtue of Section 13 (5)
- a VAT credit
- a refund under Section 35, 36 or 40 of this Act or Section 22 of the 1983 Act and
- a repayment under Section 39
in circumstances where the person concerned is not entitled to that sum.
Subsection (3) goes on to state:
The reference in subsection (1) above to the amount of VAT evaded or sought to be evaded by a person’s conduct shall be construed -
- in relation to VAT itself or a VAT credit as a reference to the aggregate of the amount (if any) falsely claimed by way of credit for input tax and the amount (if any) by which output tax was falsely understated and
- in relation to the sums referred to in subsection (2) (a), (c) and (e) above, as a reference to the amount falsely claimed by way of a refund or repayment.
Our use of subsection (3) to impose a civil evasion penalty in cases where no false claim or understatement has been made (that is, no return rendered) was considered by the Court of Appeal in Telford Building and Design Limited  S.T.C. 1096, CA. The Court of Appeal recognised that this subsection mirrors the criminal legislation (Section 72(2)(d)(i) of the VAT Act 94) and that the wording of that section was amended in 1985 to simply extend the meaning of ‘evasion of tax’ to include the fraudulent obtaining of input tax credit or repayments of VAT. Previously such offences had to be alleged under the Theft Act.
Solicitors’ Office advice in light of the above Court of Appeal decision is that the matters listed in Section 60 (2) and (3) of the VAT Act 1994 by no means refer to the only situations in which a civil evasion penalty can be applied, rather they are merely illustrative. Consequently, the range of acts and omissions that may give rise to a civil evasion penalty must be somewhat broadly interpreted. As well as a failure to register, a failure to render returns coupled with a deliberate payment of centrally-issued assessments can be dishonest conduct where the trader knew that payment of the centrally issued assessments would not discharge his true VAT liability.
Dishonest conduct may also include the obtaining of improper VAT credits, refunds of tax under the DIY Builders Scheme, refunds of tax under the bad debt relief provisions, refunds of tax in relation to new means of transport supplied to other Member States, repayments of tax to EC and third country traders, or even where VAT has been charged on a supply where no VAT was chargeable if the supplier was acting dishonestly (see the European Court of Justice case of Stadeco C-566/07).
In practice, the most common form of dishonest conduct is likely to be an under-declaration of output tax (suppression of takings) which will likely result in an assessment for tax being raised in addition to a civil evasion penalty being imposed where dishonesty is shown.