The next step

http www hmrc gov uk vat managing problems penalties htm 2

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Staff fraud. Who pays?

Falsifying invoices

In the beginning. As his business grew, Mr Trusting divided it into separate companies, a holding company and two trading companies. Mr Diddle was made a director of one of the trading companies, Civil Engineering Ltd, and was left in charge of its day-to-day running.

Much later. To his horror, Mr Trusting discovered that Mr Diddle had been falsifying invoices for non-existent sub-contractors, writing out cheques, and pocketing the money. This had been going on for ten years but the amounts had got much larger over the past four years. Mr Diddle was dismissed and sued for the money he had stolen. So what’s all this got to do with VAT?

VAT. The false invoices showed VAT, and to help conceal the fraud Mr Diddle had put them all through the books and claimed the VAT back for the company. In total, Civil Engineering Ltd had incorrectly reclaimed £25,000 of VAT.

What will the VATman think?

More bad news. In this type of situation he will not only want the £25,000 repaid with interest, but could also impose a penalty. This could be up to 100% of the tax evaded. In this case that’s another £25,000. Total bill: £50,000!

What should you do? If you’re ever in a situation like this, remember that you’re not guilty of anything but the company has been the victim of fraud. However, if you do nothing, the VATman will see this as “dishonest conduct” and you will have no hope of avoiding the penalty. So what can you do?

Step 1. Quantify the size of the VAT element of the fraud.

Step 2. Write to the VATman making a voluntary disclosure of the amount and detailing the circumstances. The sooner you do this, the sooner the interest clock stops ticking.

Step 3. Ask for a meeting to explain the situation face-to-face. Take professional representation.

Mitigation. If you co-operate fully and make a full and unprompted disclosure, the VATman should reduce the penalty to not more than 30%. In our example, that’s £7,500 rather than £25,000.

It wasn’t you!

The guilty pay. In these rather exceptional circumstances the penalty could be reduced even further. Indeed, why should the company pay a penalty at all when it’s a victim of a fraud? The guilty party can be made to pay the penalty. The VATman knows this but he may need reminding of the law as follows.

Penalty notice. If it’s clear that a director or managing officer of a company is personally responsible for the dishonest act, any penalty due on the company can be made payable by that person.

Tip. Get the penalty notice made out in the name of the guilty party, not you. You also want them to pay back the over-claimed VAT. The VATman will normally be understanding in these circumstances and allow time for you to pursue your claim.

For a link to the VATman’s guidance on penalties for fraud, visit http://vat.indicator.co.uk (VA 01.09.04).