CEP3150 - Civil evasion penalties for Customs, Excise and VAT: legislation and legal advice on liability: VAT

General

The legislation governing civil evasion is in the VAT Act 1994:

• Section 60 contains the legislation for the civil evasion penalty.
• Section 61 allows for the penalty to be recovered from directors or managing officers.
• Section 70 provides for the civil evasion penalty to be mitigated.
• Section 71 concerns ‘reasonable excuse’ and ‘credit for input tax’.

For the purpose of alleging evasion under Section 60 of the VAT Act 1994, it is not a prerequisite that a VAT return has been submitted.

Section 60(1) provides that, in any case where:

• for the purpose of evading VAT, a person does any act or omits to take any action, and
• his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability),

he shall be liable, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct.

Subsection (2) goes on to state:

The reference in subsection (1) (a) above to evading VAT includes a reference to obtaining any of the following sums:

• a refund under any regulations made by virtue of Section 13 (5)
• a VAT credit
• a refund under Section 35, 36 or 40 of this Act or Section 22 of the 1983 Act and
• a repayment under Section 39

in circumstances where the person concerned is not entitled to that sum.

Subsection (3) goes on to state:

The reference in subsection (1) above to the amount of VAT evaded or sought to be evaded by a person’s conduct shall be construed:

• in relation to VAT itself or a VAT credit as a reference to the aggregate of the amount (if any) falsely claimed by way of credit for input tax and the amount (if any) by which output tax was falsely understated and
• in relation to the sums referred to in subsection (2) (a), (c) and (e) above, as a reference to the amount falsely claimed by way of a refund or repayment.

Our use of subsection (3) to impose a civil evasion penalty in cases where no false claim or understatement has been made (that is, no return rendered) was considered by the Court of Appeal in Telford Building and Design Limited [1996] S.T.C. 1096, CA. The Court of Appeal recognised that this subsection mirrors the criminal legislation (Section 72(2)(d)(i) of the VAT Act 94) and that the wording of that section was amended in 1985 to simply extend the meaning of ‘evasion of tax’ to include the fraudulent obtaining of input tax credit or repayments of VAT. Previously such offences had to be alleged under the Theft Act.

Solicitors’ Office advice in light of the above Court of Appeal decision is that the matters listed in Section 60 (2) and (3) of the VAT Act 1994 by no means refer to the only situations in which a civil evasion penalty can be applied, rather they are merely illustrative. Consequently, the range of acts and omissions that may give rise to a civil evasion penalty must be somewhat broadly interpreted. As well as a failure to register, a failure to render returns coupled with a deliberate payment of centrally-issued assessments can be dishonest conduct where the customer knew that payment of the centrally issued assessments would not discharge their true VAT liability.

Dishonest conduct may also include the obtaining of improper VAT credits, refunds of tax under the DIY Builders Scheme, refunds of tax under the bad debt relief provisions, refunds of tax in relation to new means of transport supplied to other Member States, repayments of tax to EC and third country traders, or even where VAT has been charged on a supply where no VAT was chargeable if the supplier was acting dishonestly (see the European Court of Justice case of Stadeco C-566/07).

Failure to notify

In cases where the customer has failed to register for VAT on time, the act of evasion will generally have taken place on the date from which the customer should have been registered for VAT. This date will depend on the registration rules in force at the time, which are explained in separate books of guidance on registration. It is possible, however, that a customerr may have failed properly to register from a certain date, but only have been dishonest in relation to that failure from a later date. See Prebble & Prebble (No. 2) v. C&E [2005] UKVAT 19331.

Permanent deprivation

The decision given by the Court of Appeal in the case of Regina v Dealy [1995] 1 W.L.R. 658 confirmed that permanent deprivation is not an ingredient of a criminal offence of fraudulent evasion under Section 72(1) of the VAT Act 1994.

“Why ever should the Crown have to prove a permanent intention to deprive? The legislature are perfectly capable of putting those words in a statute if they want to. To imply the words would only add to the difficulties of the prosecution in proving their case. They would constantly have to meet suggestions that there was an intention to pay in the end, just as there was here, even though we are bound to say that the case for the prosecution was overwhelming. Why should such words be implied? The word “evasion”, does not, to our mind, imply any sense of permanence.”

By implication then, the intent to deprive permanently is also not an ingredient of civil evasion, and proof of such an intention is not needed to uphold an allegation of dishonest evasion. Intentional postponement of declaration of the correct amount of VAT due (for example, to gain a ‘cash flow’ advantage) may therefore amount to dishonest evasion.

Double jeopardy

No customer is to be put into ‘double jeopardy’ by being penalised more than once for the same conduct. For example, a customer who has been prosecuted, or has had proceedings compounded, must not be assessed for a civil penalty for the same conduct. Nor is a person who is assessed for a civil evasion penalty to be assessed for any other civil penalty for the same conduct.

However, it should be noted that it is not double jeopardy to impose a default surcharge and civil evasion penalty for conduct occurring in the same tax period. Similarly, default interest can still be applied.

It is important to make a prompt decision whether to take civil evasion action or prosecution action or to assess for a civil penalty. Civil penalty policy guidance confirms that penalties should be issued promptly after the customer’s error or failure comes to light.

If a civil penalty has been assessed it can be withdrawn and replaced with a civil evasion penalty or prosecution action taken, subject to the following considerations which apply to misdeclaration penalty (MP) - similar considerations apply to other civil penalties:

MP inhibited on assessment form but not inhibited when input.

The MP can be withdrawn and civil evasion action taken. If the customer has been notified of MP, a letter must be sent to the customer stating that the MP should not have been applied and it was an administrative error.

MP not inhibited, but the tests for MP were failed (that is no penalty was applied). In this case even though the penalty was tested for, no penalty was applied. Therefore civil evasion action can be taken, as there will be no double jeopardy.

MP not inhibited and MP was applied.

The MP can be withdrawn and civil evasion action taken. However, this should only be done where information has later come to light that has led to the view that evasion has taken place. This applies whether or not the customer has paid the penalty. However, extra care should be taken to ensure that there was no information available that would suggest the case was appropriate to investigation at the time the MP was raised if the penalty has been paid.

Inducement

Care should be taken to ensure that a customer has not been induced to cooperate with an investigation into their VAT affairs on the basis that civil evasion action or prosecution action will not be pursued. If there has been inducement the MP should not be withdrawn and civil evasion action or prosecution action should not be taken.

Tribunal Hearings

If a tribunal hearing has been held in respect of the civil penalty, before prosecution action is taken advice should be sought from HMRC lawyers, to establish whether the act of also taking prosecution action could be regarded as an abuse of process. If it would be, then the civil penalty should not be withdrawn and prosecution action should not be taken.

Please note - it is important to ensure that civil evasion action or prosecution action will take place before the civil penalty is withdrawn because it is not feasible to make another civil penalty assessment after withdrawal of a civil penalty for the same failure.