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HMRC internal manual

VAT Fraud

From
HM Revenue & Customs
Updated
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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: de-registration of labour providers using the abuse principle

Introduction

Section VATF44500 outlines the criteria for refusing VAT registration or compulsorily de-registering a taxable person on the grounds that the right to register is being abused, i.e. that the principal purpose of the registration is to facilitate fraudulent evasion of VAT. This section looks at:

  • when basic interventions are appropriate, and
  • compulsorily de-registering labour providers.

When basic interventions are appropriate

In the context of labour provision you may come across VAT-registered businesses which, through a failure to co-operate with HMRC enquiries (e.g. requests for visits or to make business records available), frustrate and delay interventions to counter VAT fraud and hence help to perpetuate VAT losses. In such cases you should firstly consider whether basic VAT interventions are appropriate, e.g.

  • The evidence may indicate that the business is not in fact making taxable supplies at all and also has no genuine intention to do so. For example where the evidence shows that the business is not the true employer of workers as alleged, but is merely masquerading in that role to enable its customer to claim false input tax credits for a directly employed workforce. If this is the case then de-registration may be appropriate on the grounds that no taxable supplies are being made, and it will not then be necessary to rely on the abuse principle. Depending on the circumstances it may be appropriate to backdate the de-registration under VAT Act Schedule 1, para 13(3), where the evidence shows that supplies have not in fact been made since the effective date of registration.
  • If there is a failure to provide evidence to support input tax claims then denial of those claims should be considered - see further guidance within VATF36100. Such action can of course be considered in tandem with any necessary action to de-register the trader.

Compulsorily de-registering labour providers

If a trader is making taxable supplies or has demonstrated a genuine intention to do so, you can nevertheless consider compulsorily de-registering such traders on the grounds that the VAT registration is being used for abusive purposes, but you must consult the VAT Fraud Team before taking such action.

Use of the abuse principle to refuse or cancel a VAT registration does not require there to be a default on the part of the taxable person concerned. However, it will be necessary to demonstrate that the principal purpose of the VAT registration is to facilitate fraudulent evasion by that taxable person or by others involved in transactions connected with that taxable person (i.e. normally within the same transaction chain). Possible indicators that would help to demonstrate this include:

  • Directors with a history of non-compliance and VAT debts.
  • Directors having no experience or knowledge of the industry in which they are operating, and being unable to answer relevant questions.
  • Any evidence of false documentation or false information provided to support applications for VAT registration.
  • Any evidence that false names and addresses have been provided for the workforce employed.
  • Non-compliance with PAYE and CIS regimes.
  • Failure to respond to queries raised or complete lack of credibility in responses.
  • No contracts in place for supplies allegedly made or received.
  • Absence of supporting paperwork that would normally be expected in relation to the types of supplies allegedly made.
  • Lack of detail on supporting paperwork.
  • Significant cash payments with inadequate audit trail or cash controls.
  • Lack of knowledge on how work is priced.
  • Lack of commercial viability, e.g. not charging an hourly rate sufficient to meet their tax obligations as detailed in the labour provider due diligence leaflet.
  • Insufficient labour force to have made alleged supplies.
  • No knowledge of relevant health and safety issues.
  • Lack of adequate due diligence on suppliers and customers.

If you have evidence that a number of these features are present in relation to a particular trader you must consult the Specialist Investigation Technical Team and/or VAT Fraud Team to discuss and determine what intervention(s) would be the most appropriate to use.