03 October 2017 
Amanda Darley, Head of Operations and Engagement
Deloitte has informed us that the Autumn Finance Act 2017 may well contain some legislation/guidance around facilitating VAT fraud. This measure is separate to the Corporate Criminal Offence/Criminal Finance Act rules which just came into force on 30 September, but also seeks to reduce the tax gap by increasing governance and transparency. Whilst the draft legislation may change between now and enactment, the broad premise is that if a business either knows or ought to know that its transactions are connected to the fraudulent evasion of VAT (‘the knowledge principle’), it may be regarded as a participant in that fraud, and it may have its right to recover input tax denied by HMRC as well as the imposition of penalties.
Deloitte has also provided the following details:
"The fraudulent evasion of VAT can take place anywhere in the supply chain, either before or after the purchase and sale by the business against whom the knowledge principle is applied. The fraud can even take place in different supply chains which do not involve the business. Therefore, regardless of where the fraud takes place, if HMRC successfully apply the knowledge principle, the business may, as a participant in that fraud, lose its right to recover input tax.
When they apply the knowledge principle, HMRC will rely on a number of factors, examples of which are:
• Inadequate commercial checks on trading partners
• Lack of commerciality of the trading arrangements
• The transactions being ‘too good to be true’
If the proposed facilitating VAT fraud penalty is enacted, HMRC are extending the knowledge principle to allow them to raise a fixed (that is, no mitigation allowed) penalty of 30% of potential lost revenue on a business and / or its directors which knew or ought to have known that its transactions were connected to the fraudulent evasion of VAT. The penalty is fixed at 30% regardless of whether the business and / or its directors knew (that is, deliberate behaviour), or whether they should have known (that is, careless behaviour).
Whilst the knowledge principle has, to date, been used by HMRC to combat Missing Trader Intra-Community (MTIC) fraud, the proposed penalty can, potentially, be applied to all forms of VAT fraud. So, a business and its directors could be penalised by HMRC at a fixed rate of 30%, with no mitigation allowed, if HMRC consider that they should have known that, for example, the business providing it with window cleaning services was deliberately under-declaring its earnings."
