In the second Finance Bill 2017, which is currently working its way through parliament, the Government has put forward proposals to introduce new penalties for “participation” in VAT fraud. This follows a consultation on the subject late last year. Whilst the measures are by no means specifically targeted at the not for profit sector, it is important that charities and, in particular, their trustees are aware of the potential implications arising from these changes to the law.

At heart, and insofar as charities and their trading subsidiaries may be concerned, there are three crucial elements to the proposed new legislation which we will address in turn:

• A new fixed 30% penalty which could be imposed on organisations that know or “should have known” that they have been involved in VAT fraud;
• The prospect of personal liability for all or part of that penalty for trustees or company officers;
• Reputational risk for both the organisation, its trustees and its company officers, with the potential to be “named and shamed” by HMRC.

The new fixed penalty

A key element of the penalty proposals is the 30% penalty – calculated by reference to HMRC’s potential lost revenue – for organisations which  either knew or “should have known” that they were involved in transactions connected with the fraudulent evasion VAT; a concept which has come to be known as the “knowledge principle”. The rate of this penalty is fixed at 30% and does not contain any of the scope for HMRC to reduce the penalty percentage normally found in the penalty regime for VAT.

The knowledge principle which underpins these new penalties has already been developed through the courts and HMRC intend for the new legislation to be understood in this context. Whilst the case law is voluminous, the conditions for levying a penalty are likely to be met where VAT is evaded in a supply chain and the organisation in question knew that transactions in which they were involved were connected with fraud, or would have known this had they asked appropriate questions.

Practically, the new penalties make it even more important for charities to undertake checks on the integrity of their supply chains, to perform due diligence on those organisations and businesses with whom they interact, and to ask questions if they have any suspicions or concerns about a particular transaction or set of transactions. To this end, HMRC’s VAT Notice 726 – whilst not specifically on the subject of the new rules – provides a useful starting point for how to ensure supply chain integrity when dealing with other organisations and businesses, and an insight into the sort of behaviours HMRC expect.

The prospect of personal liability

The scope for personal liability for the new fixed penalty will no doubt raise a few eyebrows amongst trustees and company officers.

HMRC will be given powers to assign all or part of the fixed penalty to a trustee or company officer. The power to assign the penalty will be subject to time limits and conditions as well as to the overriding consideration that HMRC cannot recover more than 100% of the original penalty. However, it raises the prospect that company officers may be personally liable for penalties where they have neither intent to defraud HMRC of VAT nor any actual knowledge of the fraud. This is likely to be a particular concern for voluntary charity trustees with limited daily involvement in a charity. It is therefore to be hoped that HMRC will seek to use these powers appropriately and with discretion.

Notwithstanding hopes for a common sense approach by HMRC, it is clear that trustees and company officers will have a markedly increased incentive to develop their knowledge and awareness of possible VAT fraud and to carefully oversee due diligence checks on supply chains.

Naming and shaming

The proposed legislation also provides for HMRC to “name and shame” organisations subject to these new penalties as well as their officers where the potential lost VAT is in excess of £50,000. This new power will allow HMRC to publish certain information about a penalised organisation or officer in a manner they see fit, albeit only once they have allowed the organisation or officer to make appropriate representations to them.

Once again it is to be hoped that HMRC apply these powers sensibly and with discretion. It would seem inappropriate to publish such information in respect of those trustees whose daily involvement in the charity is limited. Were such a situation to arise, HMRC should be urged to give careful consideration to all representations before taking action.

Closing thoughts

A tough attitude towards the evasion of VAT is of course to be welcomed but as with any increase in HMRC powers there is always the concern that these could be used inappropriately.

The risks for charities and trustees should not be overstated, these measures have been put in place to combat VAT fraud and, in particular, “missing trader” fraud, a type of VAT fraud which is most prevalent in organisations which buy goods and services with a view to resale.

Nonetheless, charities, trading subsidiaries, trustees and company officers should take the proposed new legislation as a reminder of the importance of checking the integrity of the organisations and businesses with whom they deal and not to turn a blind eye if something looks wrong or suspicious. If they do, the resulting financial, reputational and personal risk will increase significantly with the introduction of these new rules.

Edd Thompson is an Indirect Tax Assistant Manager at Mazars

Juliet Bailey is an Indirect Tax Manager at Mazars