Company directors watch out – you can be personally liable for VAT penalties!

Have you heard of VAT missing trader fraud?

The taxman certainly has, and he issues guidelines on how to spot it and avoid it.

In a nutshell, missing trader fraud happens when a trader charges VAT on a sale, but hangs on to the money instead of handing it over to HMRC. It is called missing trader fraud because the trader goes missing with the VAT.

Even though most companies wouldn’t dream of committing fraud, it is easy for careless firms to get caught up in this particular kind of VAT fraud. If you are part of a supply chain where missing trader fraud is taking place, then you may be liable.

Worse: if you are a company director, you may be personally liable.

This is a circumstance that happened in August 2015, when Paul Hovers and Stephen Bell – both directors of Carwood Commodities Ltd – were handed personal liability notices of £89,306 each.

Carwood Commodities was a scrap metal dealer that went into liquidation in December 2014. HMRC found that, in its VAT returns for April and July 2013, the directors had allowed the company to wrongfully claim £291,611 from HMRC in Value Added Tax.

Some the clues HMRC picked up on are listed in the 13-year disqualification notices of both directors. They include:

  • Generating turnover very quickly from an insolvent position, without significant effort or working capital
  • A low level on profit in transactions – a common feature of VAT fraud
  • Failing to check the VAT status of its supplier (GPSE Ltd) before entering into trades in excess of £1.4 million
  • Failing to undertake independent credit checks on customers before undertaking trades valued at over £1.5 million
  • Being able to source goods and complete a purchase on onward sale in a very short space of time – often on the same day.

 

Just as importantly, the directors had been alerted by HMRC about the importance of being aware of missing trader fraud. Despite this, the company still failed to undertake effective crucial due diligence on its supplier, even though it had been warned that VAT fraud was common in the scrap metal industry.

Because of these factors, HMRC was able to show that the directors “knew or should have known” that it was making transactions connected with VAT fraud. For the sake of cheap deals, both of them ended up with a hefty personal bill and are disqualified from directorships for well over a decade.

Similar penalties have been issued to many other people. So how do you prevent them from being applied to you?Our top recommendations are:

  • Watch out for deals that hand you big profit margins – they are a typical hallmark of VAT fraud
  • Don’t skimp on due diligence – always undertake thorough checks on your suppliers before trading with them
  • Remember – if HMRC finds you have knowingly enabled missing trader fraud, you could be liable for the tax due plus penalties of up to 70%.

 

In short, keep a careful eye out: carelessness can cost you a small fortune. If you have any questions or concerns about VAT fraud, do talk to us today. Our Chartered Accountants are always very happy to advise you with offices in CheamChelmsfordWansteadSaffron Walden and London City.

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