HMRC Targeting Supply Chain VAT Fraud

HMRC Targeting Supply Chain VAT Fraud

Company directors who either commit VAT fraud or fail to demonstrate procedures to prevent VAT fraud in the supply chain are being targeted by HMRC with a trader monitoring campaign shaped by The Kittel Principle, which defines whether a director has been fraudulent, knew about a fraud or, more particularly, should have known about a fraud.

One of our leading VAT specialists, Veronica Donnelly, is warning that Directors need to be aware of The Kittel Principle, and the penalties that await those who fall foul of the rules.

The Kittel Principle

The Kittel Principle stems from a European Court Case in 2006 and was set in UK law in 2017.  It is being actively implemented by HMRC as the framework against which suspected VAT fraud is assessed.  The onus is on Directors to not only ensure their business is compliant, but also to ensure their supply chain is compliant and any fraud risk is identified and removed. Directors must also demonstrate that clear policies are in place, are fully documented and are being actively implemented.

Where does the responsibility lie?

There is a huge burden of responsibility on company Directors to review, assess, check and police VAT and tax compliance in the supply chain, with severe penalties for getting it wrong. 

Directors are legally obliged to demonstrate that their VAT returns and crucially, VAT charges by any suppliers or contractors, are accurate and truthful.  The burden of proof and proactivity is now squarely on Directors; it is not the responsibility of HMRC to give specific guidance.  This shift in accountability carries high risks for mistakes, ignorance, taking poor advice and poor data management.

What should businesses do?

• Consider appropriate policies and document them - Businesses should have policies in place that demonstrate how they have applied scrutiny and ensured they are aligned with HMRC guidance
• Ensure supplier follow-up - if questions are asked of suppliers, businesses must show evidence to HMRC that answers were scrutinised

If you are concerned about your liabilities and VAT reporting status across your supply chain, please get in touch with a member of our specialist VAT team or your usual Azets contact.