As a business, you may be entitled to make a claim for a VAT credit or refund in numerous circumstances, including on necessary business expenses. However, it is essential that you only do so when you have a valid legal claim.

Claiming VAT back through dishonest means is a potentially serious form of VAT fraud, and if you are found to have done so, you risk facing a number of legal consequences that will damage your business. As such, all VAT-registered companies and sole traders must take care to follow the rules when making such a claim.

Here, we explore what could happen if you are accused of this kind of VAT fraud, as illustrated by a real-life case example from 2016.

The consequences of fraudulent VAT refund claims

There are a number of ways in which a business might find itself accused of dishonestly claiming a VAT refund to which it was not entitled. For example, this may happen if you or your organisation knowingly submits an incorrect tax return or miscalculates your tax bill; it may also involve the submission of misleading or falsified receipts and invoices.

You are likely to face a penalty under the following circumstances

• You submitted inaccurate documentation that resulted in an understatement of your tax liability, a false or inflated refund claim, or a false or inflated account of a loss
• This inaccurate information can be shown to be a consequence of carelessness or deliberate deception

If this is the case, you will be asked to repay any overdue tax that you owe, in addition to further fines calculated as a percentage of the amount owed. If you can be proven to have submitted false documentation to HM Revenue & Customs, you may also face a custodial jail sentence.

The extent of the additional fine you must pay will depend on whether the inaccurate accounting was a consequence of your carelessness or deliberate action:

• If honest mistakes have been made despite taking reasonable care, you will face no additional penalty beyond repaying the amount owed
• If the inaccuracy was caused by a careless mistake, a penalty of 30% of the potential lost tax revenue must be paid
• If the inaccuracy was deliberate but not concealed, the penalty percentage will be 70% of the lost tax revenue
• If your case involved a deliberate and concealed inaccuracy, you must pay 100% of the lost revenue on top of the amount itself

To find out more about penalties for VAT fraud, click here.

A real-life case study

The potential perils of this kind of dishonest action can be demonstrated by the 2016 case of Peter Arakiel Brookes vs HMRC, which saw Mr Brookes appeal against an initial HMRC decision to deny recovery of approximately £40,000 of VAT, which they believed had been obtained dishonestly.

The Upper Tribunal heard the case relating to Mr Brookes’ company, Villagepark Homes Limited (VPH), for which Mr. Brookes was the sole director. Following on from a property development project for which Focus Strip Limited (Focus) was the main contractor, HMRC paid a visit to VPH, and an officer noted that the records necessary to facilitate VAT recovery were not present.

Specifically, it was noted that VPH could not present valid VAT invoices relating to the services supplied by Focus, for which VAT had already been recovered. No invoices had been issued at the time of the supply, so the VAT that had been recovered by Mr Brookes was the appropriate percentage of the gross amount charged.

When HMRC challenged this, fabricated copy invoices were provided retrospectively, seemingly created for the purposes of the case. This raised concerns about dishonest dealings, although Mr Brookes himself had openly described the invoices as “useless”, which cast doubt on whether or not he was responsible for fabricating them himself for fraudulent reasons.

Ultimately, the question of dishonesty could not be settled by the Upper Tribunal, due to it being unclear whether the copy invoices had been produced by Mr Brookes or by Focus. However, the inconvenience caused highlights how important it is to avoid making a VAT claim unless the taxpayer is fully satisfied that they are entitled to recovery, and that all necessary criteria have been satisfied to prevent exposing the business to potential financial penalties.

What should you do if accused of dishonestly claiming a VAT refund?

If you or your business are placed in a similar position to this, it is most important to act quickly. Penalties are intended to be applied fairly by HMRC, meaning that businesses that comply with the investigation will be treated more favourably than those who attempt to evade consequences.

If you are at potential risk of facing a penalty over an accusation of fraud, taking the following steps can help to mitigate the amount you will need to pay:

• Alerting HMRC to the inaccuracy; if this disclosure was unprompted, you will receive greater leniency than if the disclosure was prompted by you having reason to believe that HMRC was going to find the error
• Helping HMRC with its investigation, including quantifying the inaccuracy and working out how much you owe
• Giving HMRC access to your figures and business records to aid their enquiries, or responding promptly to requests for information

This is why it is important to adopt an honest approach to your VAT accounting and dealings with HMRC, even in cases where your business is already under investigation. By making the effort to provide the correct evidence on all occasions, you can ensure that your business does not suffer any unnecessary negative consequences.

If you want to learn more about how you can make sure your business stays on the right side of VAT law at all times, please call our free VAT helpline. You can reach our team of VAT experts on 0161 477 6600 to get the answers to all of your questions.