VAT Fraud Investigations: What to Expect If HMRC Comes After You

‘VAT fraud’ is a blanket term used for a variety illegal actions that make use of VAT, this includes incorrectly claiming VAT, or evading to claim it altogether, and more. Here are four examples of crimes that can be considered a form of VAT fraud:

• Smuggling 

This form of smuggling refers to bringing physical goods into the UK without paying the correct VAT cost. This can be through paying the wrong amount, or attempting to avoid it altogether. 

• Output tax fraud 

Instead of paying VAT to HMRC, businesses keep the VAT they have charged to their customers. This is done by not declaring the VAT they charged, or claiming the wrong amount. 

• Input tax fraud

Input tax fraud is when VAT is incorrectly claimed, either by claiming more than was actually charged, or claiming a VAT refund on goods/services they did not purchase. Money laundering businesses often create fake invoices to attempt to hide the funds.

• VAT reclaim fraud 

This involves individuals or businesses making fraudulent claims for VAT refunds on goods they haven’t exported or for business expenses they haven’t incurred.   

What are the consequences of VAT fraud?

The consequences of VAT fraud include substantial fines, and prison time in more serious cases. Businesses can be forced to close as a result of fines if found guilty. Even if a business can still salvage its operations, reputational damages can mean customers, if they know, will avoid using the business. 

How does HMRC investigate VAT fraud accusation?

Her Majesty’s Revenue and Customs takes accusations of VAT fraud very seriously.  Their investigation process typically involves the following steps:

• HMRC are notified of a fraud accusation towards an individual or business. They undergo an assessment of the information provided in the accusation. If the source and information is credible, the nature of the fraud can be established. 

• If HMRC want to move forward, they can decide to support or refute the accusation. For either option, they accumulate evidence by surveillance of the business, interviews, analysing financial documents and data, and collaborating with law enforcement or other relevant regulators. 

• In the investigation, HMRC will approach covertly as to not arouse suspicions. This can take the form of forensic accounting, and more.

• Once the investigation is finished, HMRC will use their evidence to issue a civil penalty if there is no deliberate fraud. They can also prosecute if their evidence supports purposeful VAT fraud. If evidence is insufficient, HMRC will take no further action. 

• If HMRC prosecutes, the case, including evidence gathered, is passed on to the courts for a trial. The accused party will have a chance to defend themselves with legal representation. 

What does a solicitor do for a client accused of VAT fraud?

A solicitor will defend a client accused of VAT fraud by challenging the evidence, demonstrating a lack of intent, challenge HMRC’s investigation procedure, negotiating with HMRC, or pleading mitigation. Here’s an insight into each defence method:

Challenging the evidence

This includes analysing financial records to identify errors or alternative explanations for alleged discrepancies. Whilst also gathering evidence from witnesses to support the client’s version of events, if available. Obtaining testimony from experts in tax law can also be used to challenge HMRC’s perspective of the evidence they collected.

Demonstrating a lack of intent

A key element of VAT fraud is intent. A solicitor will argue that any errors or omissions were not on purpose, they could be due to genuine mistakes, misunderstandings of the law, or relying on the wrong advice. 

This can be evidenced by demonstrating that the client took steps to understand and comply with VAT regulations. Such as showing that the client acted on the advice of an accountant or tax advisor. Or highlighting any circumstances that could excuse the fraud.

Procedural challenges

A solicitor will scrutinise HMRC’s investigation methods to ensure they were followed properly. Any irregularities in the investigation process could be grounds for challenging the evidence or even having the case dismissed.

For example, if HMRC obtained evidence through a search warrant, the solicitor will ensure the warrant was lawfully obtained and executed. They also make sure that any interviews conducted by HMRC were conducted fairly and in accordance with legal safeguards.

Negotiating with HMRC

In some cases, it may be possible to negotiate a settlement with HMRC, this avoids a long and costly trial. This might involve agreeing to pay a penalty or repay any VAT owed.

Pleading mitigation 

If a client accepts responsibility for some or all of the charges, the solicitor will present mitigating factors to the court to reduce any penalties or sentence.

What are some common defences against VAT fraud accusations?

• Genuine mistake: Arguing that any errors were unintentional.
• Lack of knowledge: Claiming a genuine misunderstanding of VAT regulations.
• Reliance on incorrect advice: Showing that the client acted on the advice of a professional.
• Duress or coercion: Claiming that the client was forced to commit fraud.

Legal representation for VAT fraud allegations