VAT Missing Trader Fraud: Red Flags, HMRC Penalties and What Accountants Should Do

Missing trader VAT fraud sounds like a problem for customs agents and large wholesalers, but it can land on any accountant whose client buys and sells goods in a supply chain. The risk is not only that your client is the fraudster. A genuine business can lose its input tax, face a penalty, or be pursued for someone else's unpaid VAT if HMRC concludes it knew, or should have known, that its deals were connected to fraud. This guide sets out the red flags and consequences described in HMRC's own published guidance, and flags what we could not confirm. It complements our money laundering red flags guide for accountants.

What missing trader fraud is

HMRC's leaflet How to spot missing trader VAT fraud (issued December 2020) describes a "missing" or "defaulting" trader as one that deliberately fails to pay the VAT due on taxable supplies made in the UK. Goods may pass through several intermediary traders, forming what HMRC calls "tax loss chains". The leaflet adds that fraudsters sometimes mix in chains with no tax loss to disguise the losses.

Red flags in HMRC's leaflet

The leaflet groups its warning signs into two sets. On the legitimacy of customers or suppliers, it lists:

• little or no trading history;
• a buyer and a seller contacting you within a short time, each wanting or offering the same goods, specification and quantity, or a supplier who refers you to a customer wanting exactly what they sell;
• a deal that carries no commercial risk to you, such as no payment due until your customer pays;
• consistent or predetermined profit margins regardless of date, quantity or specification, without normal price negotiation;
• requests to pay third parties or an offshore bank account;
• goods that are not adequately insured, or high-value deals with no formal contract;
• high-value deals from a newly established supplier with minimal history or a low credit rating, or a small new business offering goods cheaper than an established supplier; and
• HMRC having already told you that earlier deals with the supplier were linked to fraudulent VAT losses.

On the viability of the goods, it lists doubt that the goods exist in the quantity and specification offered, doubt about their condition, large quantities of non-UK-specification goods offered for UK supply, and unclear recourse if the goods do not match their description.

What HMRC expects businesses to do

HMRC says businesses should check who they deal with in proportion to the commercial risk. It does not expect checks beyond what is reasonable, but it does expect you to judge the integrity of the whole supply chain. Its examples include verifying incorporation and VAT registration, obtaining signed introduction letters and trade references, running credit checks, meeting a senior officer in person, and checking bank details against the supplier's country. It also says to keep supporting paperwork, such as purchase orders, pro-forma invoices, delivery notes and inspection reports. The leaflet stresses that checks are not prescriptive: each business decides what is appropriate for its own transactions.

The consequences if HMRC concludes you knew, or should have known

According to the leaflet, HMRC may refuse input tax on transactions where you knew or should have known of a connection to fraud, judged on all the circumstances, including whether you verified your supply chain. Before a refusal HMRC sends a decision letter explaining its reasons, and a central team independently reviews the case. You can ask HMRC to reconsider, request a review by an officer not previously involved, or appeal to the First-tier Tribunal.

HMRC's factsheet CC/FS42 adds a penalty. Under section 69C of the Value Added Tax Act 1994, HMRC may charge a penalty of 30 per cent of the VAT denied or assessed under the knowledge principle. The factsheet gives the example that £1,000 of denied input tax would lead to a £300 penalty. It says the penalty applies to transactions after 16 November 2017, and that mitigation is available only if you were not primarily using your VAT registration number to take part in fraud, and not at all if more than half the value of transactions in any VAT period was artificially contrived or fraud-connected and you knew or should have known.

Joint and several liability for specified goods

VAT Notice 726 deals with a separate rule. A VAT-registered business that receives a taxable supply of specified goods, and knew or had reasonable grounds to suspect that VAT on that supply or any previous or subsequent supply would go unpaid, can be made jointly and severally liable for the unpaid net tax once it receives a notification of liability. The notice says the specified goods are, from 1 May 2007, equipment made or adapted for use as a telephone or computer and other electronic leisure or entertainment equipment such as digital cameras and portable music players. It sets a rebuttable presumption of reasonable grounds to suspect if you bought the goods for less than the lowest open market value or less than any previous supplier paid. You have 21 days from HMRC's notification to respond with evidence, and 30 days from a notice of liability to appeal, and you must generally pay before the appeal is heard unless you show hardship. The page's visible date is 31 December 2020, so check the live GOV.UK page for the current version.

What this means for accountants

These are our suggestions, not HMRC guidance. If a client trades goods, particularly electronics, and shows several of the red flags above, document what you asked and what you were told. Ask how the client checks its suppliers and customers, and whether it keeps the paperwork HMRC mentions. If your own suspicion grows, consider whether it triggers a duty to report: see our guide to suspicious activity reports and tipping off. HMRC's leaflet also notes that the Criminal Finances Act 2017 offence of failing to prevent the criminal facilitation of tax evasion has applied since 30 September 2017, which is covered in our guide to preventing the facilitation of tax evasion. HMRC says suspected VAT fraud can be reported anonymously through GOV.UK.

What we could not confirm

• We read HMRC's December 2020 leaflet and did not check whether HMRC has issued a newer version.
• We did not read tribunal case law on the "knew or should have known" test, so we do not describe how courts apply it.
• We did not read HMRC's internal VAT fraud manual in full, nor any rules specific to advisers who assist a fraud.
• We did not cover Irish or EU equivalents, or use any statistics on the scale of VAT fraud.

Frequently asked questions

Is the knowledge test only about dishonest businesses?

No. HMRC's wording covers businesses that "should have known", judged on all the circumstances, including what checks they made.

Does paying the 30 per cent penalty end the matter?

No. The penalty applies alongside the denial of the VAT right, as the factsheet describes.

Where can I learn more about compliance?

See our CPD courses for accountants and finance professionals.