VATF45210 - Basic interventions: matters to consider when determining whether to use a civil intervention: assessments and penalties: raising penalties in particular circumstances: company officer liability: scope

HMRC may issue a notice to a company officer, making them liable to part or all of a s69C penalty charged on the company.

The main statutory condition is that the “actions of the company” which gave rise to the s69C penalty were attributable to the officer. 

Knew or should have known

As a matter of policy, we will only make a company officer liable to pay a company penalty if we can show that they personally “knew or should have known” that the relevant transactions were connected to VAT fraud.

You should apply the “knew or should have known” test to the individual according to the same principles and practices that you use in applying it to the company as a whole, but focusing only on the information and understanding held by the individual in question.

The test for “knew” is: can we prove on the balance of probabilities that the company officer did know of the connection with fraud?

The test for “should have known” is: would a reasonable business-person have concluded that the company officer ought to have known that the only reasonable explanation for the transactions was that they were connected with fraud?  

When are actions of the company attributable to an officer?

Where we can show that a knew or should have known that transactions on which input tax or zero rate was claimed were connected with VAT fraud, then we can say that the actions of the company which led to the s69C penalty were attributable to that director’s acquiescence (at least) in the transactions and claim. Directors have a responsibility to intervene in such a situation, even if they did not set it up themselves.

In some circumstances it may be reasonable for a director not to know about the connection with fraud. This is most likely where a director has no involvement with sourcing suppliers and agreeing purchase deals, reasonably trusts another company officer to do this work well, and sees nothing in the company’s work or financial results to arouse suspicion. For example, Director A could be mostly focused on planning and delivering work for customers, with no reason to question the steady provision of good quality supplies at commercial prices which Director B is arranging. In such a case, we would probably not look to make Director A liable for the penalty.

A company officer who is not a director (or a shadow director or a director) may also meet the “knew or should have known” test. But the company’s relevant actions are unlikely to be attributable to them unless they took an executive role in either arranging or authorising the transactions, or authorising the VAT returns. A “manager” who merely acts under instructions would be a company officer, but would not usually be a suitable subject for a s69D notice.

Where a non-employed agent is hired to manage purchases, and arranges the connection to VAT fraud, they will rarely be a company officer themselves (although their actions are directly attributable to the company, and are the basis for the denial and the s69C penalty). But any director who “knew or should have known” that the agent was arranging transactions connected with VAT fraud may be made liable to pay the penalty under s69D.

Who is an officer?

An ‘officer’ is defined as the director, secretary or manager of a company. Where the entity is an unincorporated association, a person ‘managing or purporting to manage’ the association’s affairs is also an officer. For a limited liability partnership, any member is an ‘officer’.

You should not normally seek to attribute liability to pay to company officers where you expect the business to be able to pay the penalty. However, there may be exceptional circumstances, where recovery action against the company officer may be appropriate.