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HMRC internal manual

VAT Fraud

What to consider prior to determining whether to use an intervention: matters to consider when looking at particular types of taxable person or activity: labour providers: has a supply been received?

In checking the credibility of an input tax claim you must first consider whether there has been a supply (see VATF34000).

‘Input tax’ is defined in Section 24(1) of the VAT Act 1994. The relevant part of that definition is as follows:

VAT on the supply to him of any goods or services; being goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

The above definition includes the term ‘VAT’, so it is also important to consider the scope of VAT as set out in Section 4(1) of the VAT Act:

VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

Thus the first questions to consider are:

  1. Do the amounts claimed as input tax relate to supplies of goods or services actually received by the trader?
  2. Were those supplies received in the course or furtherance of any business carried on by the person claiming the input tax?

In reaching your conclusion you should take account of all the relevant circumstances and evidence.

Important factors to consider will be:

  • The trader’s business records: in addition to the invoice, is there supporting evidence in the form of normal commercial records - e.g. timesheets, wage records, correspondence, estimates, payment records etc - to indicate that the supplies were actually received?
  • Do HMRC records (Construction Industry Scheme (CIS) and/or Pay As You Earn (PAYE)) indicate that the supplier employed a sufficient workforce to enable them to have made the purported supplies?
  • The credibility of the work purportedly undertaken, e.g. having regard to site locations and available workforce, is it reasonable that the purported work could have been undertaken within the days or periods specified?
  • Observations: depending on site locations and the nature of the alleged supplies, it may be possible to observe whether or not any work has been undertaken at the specified sites.

Any decision to deny input tax based on an allegation that the purported supplies did not in fact take place carries with it the inherent difficulty of proving a negative proposition. Therefore there will usually need to be some objective evidence, rather than, for example, just the absence of a particular document, in order to support such a decision.

This evidence may simply consist of the results of simple credibility calculations or observations. Having considered all the circumstances it may be that it is simply not credible that the purported supplies occurred. For example, you may be able to establish that the alleged hours of work could not feasibly have been undertaken in light of the Labour Provider’s available workforce (either PAYE employees or use of further sub-contractors) during the relevant period. Provided you have taken proper account of all the information available to you, and given the taxable person an opportunity to explain any anomalies, such a conclusion may form the basis of a decision to deny the customer’s input tax on the grounds that the purported supplies were not received.

VATF36130 looks at whether the supply was a taxable supply.