Value Added Tax (VAT) is a charge made on a supply of goods or services made in the UK which are classed as taxable supply. VAT must be collected by a taxable person in the course of business. A taxable person is a person required to be registered for VAT purposes. Input tax is a tax paid by a particular person on the supply of the goods and services to that person. Output tax is a tax charged by a business when it is supplying goods and services.
What is VAT fraud?
VAT fraud is the simplest and most prevalent form of VAT fraud uncovered by HMRC. Here, VAT registered traders are accused by HMRC of failing to declare their actual or true liability on VAT returns by suppressing sales or inflating purchases, and sometimes both. Cash-based businesses such as restaurants, pubs, taxi firms, and launderettes are the main suspects targetted by HMRC.
HMRC Penalties for VAT evasion
HMRC usually deal with these cases under the civil evasion penalty regime. In relation to VAT and VAT credits, the prescribed penalty is 100% of the amount evaded and with respect to refunds and repayments it is the aggregate of the amount of input tax which was overstated and output tax which was understated. Penalty mitigation may apply (in terms of a reduction up to 40%) if one is able to self-report and provide an early and honest explanation.
Sometimes though, if the case meets one of the criteria for criminal prosecution, then HMRC will seek to commence proceedings in the criminal courts. Intentional evasion of VAT is an offence under section 72(1) of the Value Added Tax Act. The maximum penalty at the Crown Court is 7 years imprisonment and unlimited fine.
VAT liability on transfers of assets
If you plan on selling your business or any part of your business, Capital Gains Tax (“CGT”) will likely be at the forefront of your mind, but VAT should be right alongside it. Assets sold by a VAT registered business (your VAT taxable turnover is more than the £85,000 threshold in a 12-month period or you expect to go over the threshold in a single 30 day period) are normally subject to VAT.
However, certain legislative provisions provide that where a VAT registered/registrable business (or part of business) is transferred as a going concern (TOGC) (a business is operating and making a profit), the business assets if sold as part of the business fall outside of the scope of VAT – in other words, no VAT is required to be paid.
It is important to note that the transfer of a business which does not qualify to be treated as a TOGC may very well still render the purchaser liable for VAT registration. Further information on this can be found here.
When does Transfer of a Going Concern (TOGC) apply?
The law in this area can be complicated and it is advisable that specialist tax advice is sought, however generally speaking, the main conditions are:
- The assets are sold as part of a business which is a going concern;
- The assets are used by the buyer with the intention of carrying on the same type of business as the seller;
- If the seller is VAT registered, the buyer too must be (or become) VAT registered;
- In respect of land/buildings, the buyer must notify HMRC that they have opted to tax the land and notify the seller that their election to tax has not been disapplied (both notifications by the relevant date) (Unless the buyer is selling land/buildings in respect of which there has been no election to tax, in which case notification is not necessary);
- If only part of the business is sold, that part must be capable of operating separately;
- There must not be a series of immediate transfers of the business; and
- While the business or part of the business may include assets, such as land or machinery, the buyer must be buying all or part of the business, not just the assets.
LEXLAW Case study: TOGC
Our client, the Appellant, was a special purpose vehicle (“SPV”) which bought and sold a commercial property. The property was let out to tenants already in occupation at the time of the purchase and also to tenants entering possession after the purchase. The SPV later sold the property and was issued with a VAT assessment of over £1 million. HMRC argued that the sale was not a transfer of a going concern (they alleged that the use of the property following the sale differed from the use before). The SPV instructed us as tax specialist lawyers to negotiate with HMRC and then prepare and represent them in an appeal before the Tax Tribunal. We took the following successful steps:
- Appealed against the assessment outside of the 30 day limit
- Delayed payment of the assessment pending appeal; and ultimately
- Had the assessment withdrawn reducing the assessment amount to nil.
Expert London VAT Evasion Lawyers
Our lawyers have the necessary expertise to effectively liaise with HMRC in respect of any inquiry, and if necessary assist our clients in either the civil regime before the civil courts/tax tribunals or to defend our clients before the criminal courts.Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, criminal tax evasion and HMRC enquiries and investigations
Our specialist Tax Solicitors and Barristers deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability.
HAS HMRC MADE YOU PART OF A VAT INQUIRY? We are able to provide clear advice to assist you. Our Tax Disputes professionals are available to give information and advice for businesses that wish to register for VAT and/or make an organised disclosure to HMRC. To contact one of our specialist VAT Lawyers please email or call 02071830529.