A crackdown on VAT fraud could turn business leaders into "pariahs"

Oliver Gill
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The consultation proposed increased powers for the taxman to clamp down on VAT fraud

Business leaders could be held personally responsible for employees going behind their back and undertaking fraudulent actions if government proposals are taken forward.

An HM Revenue & Customs (HMRC) consultation on VAT reform closes for comments next week and experts are staggered that the plans heighten the bar of the level of detail company directors need to know.

Businesses and their directors can be slapped with penalties if they “knew or should have known their transactions were connected with fraud”. This means that directors could be brandished tax cheats despite being wholly unaware of fraudulent actions going on.

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"Businesses who 'should have known' about VAT fraud are often inadvertently drawn into fraudulent supply chains and perceive themselves to be as much the victim of the VAT fraud as HMRC," said Jayne Harrold, an indirect tax disputes and litigation senior manager at Big Four accountants PwC.

In particular, said Harrold, this would affect larger businesses given that they are "more likely than they were historically to find themselves unknowingly purchasing from, or selling to, supply chains that leads to the fraudulent evasion of VAT".

Simon Newark a partner at accountants UHY Hacker Young agreed: “HMRC risks turning legitimate businesses that get unwittingly caught up in VAT fraud into collateral damage in its war on fraud... ‘naming and shaming’ them would risk unfairly turning them into pariahs."

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PwC said that if the proposals including in the consultation were taken forward, then the taxman could find themselves being subject to a greater degree of challenge from businesses.

"This may result in a greater number of affected businesses taking a view that the commercial balance has swung back towards litigating rather than accepting a settlement," said Harrold.

Newark added that he was worried that HMRC could be rather trigger-happy if given the new powers.

“Given that there will be no repercussions for HMRC if it gets it wrong, and that innocent businesses dragged into the tax tribunal to defend themselves can’t even reclaim their costs, there’s a real risk that HMRC could slip into using a ‘shoot first, ask questions later’ approach,” he said.