Heavy new penalties for VAT evaders boost revenue from HMRC investigations by 18%

Investigations by the department's Large Business Service (LBS), which deals with the tax affairs of the UK's 770 biggest businesses, pulled in 18% more additional income than the £1.23bn collected in 2011/12, according to the figures. The amount collected from investigations into large companies' VAT arrangements has more than trebled from the £443 million collected in 2009/10, according to the figures.

VAT and indirect tax expert Darren Mellor-Clark of Pinsent Masons said that one of the reasons behind the increase was the effect of new powers granted to HMRC to levy additional penalties on businesses that fail to cooperate with its investigations. Fines range from 30% to 100% of potential lost revenue, depending on whether the missed payment was deliberate or involved concealing VAT information, he said.

"Over the past year, HMRC has been making use of its power to crack down even harder on businesses that it deems 'unhelpful' when investigating their VAT arrangements," he said. "Depending on how serious investigators decide the infraction is, businesses can see their VAT bills double when penalties are included."

"With HMRC still under pressure to increase its overall tax take, these penalties can be a vital top-up for the tax authority," he said.

The LBS has come under increasing pressure to collect more tax from large businesses since the low levels of tax paid by multinationals including Starbucks, Google and Amazon came to light, Mellor-Clark said. As part of its compliance activity programme, HMRC has been expanding its strategy of "rigorously investigating" large businesses in VAT fraud cases, in an attempt to reduce the amount of revenue lost in this way.

VAT fraud costs EU member states more than £800bn a year, according to Europol estimates. Typical frauds include missing trader intra-community (MTIC) frauds such as acquisition fraud or carousel fraud.

Criminal traders can import VAT-free goods and charge VAT on their sale, before disappearing without paying that VAT to HMRC. In carousel fraud the same goods are recycled through a complex supply chain, having been acquired from within the EU at a zero rate of VAT, with each successive export from the UK triggering a VAT repayment from HMRC.

The rules allow tax authorities to deny a VAT refund claim to other companies in the supply chain that "knew, or should have known" that the transaction was fraudulent. This means that authorities do not have to go after fraudsters directly. HMRC is also now preventing legitimate parties in the chain from reclaiming VAT payments on the trades, in an attempt to force them to check that their trading partners are not involved in fraud, according to Mellor-Clark. Firms in the financial services, energy and retail sectors had been particularly affected by this tougher stance, he said.

"While few would disagree that it is important that HMRC does as much as possible to prevent carousel fraud, aggressively cracking down on unwitting parties that are involved - often through no fault of their own - is, for some observers, a controversial method to increase VAT yield," he said.

"It is extremely difficult for businesses to ascertain with any certainty whether a supplier is involved in fraud; and a lot of the businesses affected will question why they are being held responsible for a flawed system and the actions of criminals they never knew existed," he said.