What to consider prior to determining whether to use an intervention: making and issuing a Notice of Direction: when the measure can be applied: deciding whether a Notice of Direction should be issued
There are various factors that should be taken into account when considering whether a NoD should be issued, including the following.
‘Reasonable Grounds for believing’
It is important to remember that the aim of issuing a NoD is for HMRC to obtain information that might assist us in combating VAT fraud. You should bear in mind that a NoD is not intended to be a sanction against the recipient, nor does it require or carry any implication of knowing involvement in VAT fraud on the part of that taxable person.
Supply chain verification
This is explained in VATF35500. Before a NoD is issued it will normally be expected that transactions involving the taxable person will have been traced to defaulters or contra traders. However, if this isn’t the case (i.e. transactions haven’t yet been traced), the issue of a NoD may still be justified if the nature of the taxable person’s transactions and/or the previous trading history of persons involved in the company, point to a likelihood that its transactions will be connected with fraud.
The taxable person’s previous trading history
If the taxable person has previously dealt with other taxable persons who have unpaid VAT, or its own previous history shows unpaid VAT, these could be used to demonstrate ‘reasonable grounds for believing’.
The previous trading history of directors, company secretaries, shareholders, employees etc
Again, if an officer, shareholder or employee of the taxable person has a history of not paying VAT then this might be used to demonstrate ‘reasonable grounds for believing’.
The trading pattern of the business
There might be evidence that the intended pattern of trading has the characteristics of involvement in supply chains connected with fraud. These characteristics include:
- trading in standard rated goods of significant value and quantity,
- bought and sold on a ‘back-to-back’ basis,
- un-commercial terms of payment or transfer of title, and
- lack of substance of the parties involved in terms of fixed assets, staff employed etc.
The above list is not exhaustive.
For more information see VATF60000.
The use to which the requested information will be put
As outlined above, the key criterion for the measure is that the records we are requiring the taxable person to keep might assist in identifying taxable supplies in respect of which the VAT chargeable might not be paid. This means that we must have an intention to actually use the information to further our enquiries into transactions connected with VAT fraud, and will need to demonstrate this in the event of an appeal against the issue of the NoD. Thus you need to be clear as to how you will actually use the information obtained - a feeling or inclination that the information would be ‘nice to have’ is not sufficient.
Impact on the taxable person
You should bear in mind HMRC’s obligation to act proportionately in its dealings with taxpayers. By granting the power to the Commissioners to direct additional record-keeping requirements Parliament clearly had regard to the serious threat posed by VAT fraud to the public finances, which justifies the application of special measures. However, there is still a need to consider the balance between the value of the records in question in combating VAT fraud and the burden that will be placed on the taxpayer, in terms of cost and disruption to their business, of complying with the NoD. If the taxable person raises issues of this nature you are entitled to ask them for evidence of the alleged cost or burden to their business.
If you require advice on considering issues of proportionality in relation to a proposed NoD then please contact the VAT Fraud Team.