VAT Securities and the Criminal Consequences

1.   These can be issued where the VAT sum was, or may have, become due in contravention of paragraph 4(2) of schedule 11 to the Value Added Tax Act 1994 and by virtue of Section 171(4) of the Customs and Excise Management Act.

2.    HMRC may impose a requirement that security be provided:

a.     in circumstances where a trader having no establishment in the UK fails to appoint a UK VAT agent (VATA 1994, s 48(7));

b.    as a condition of paying a VAT credit where HMRC consider it necessary to do so for the protection of the revenue (VATA 1994, Sch 11 para 4(1A));

c.     as a condition of a taxpayer supplying or being supplied with goods or services where HMRC consider it necessary to do so for the protection of the revenue (VATA 1994, Sch 11 para 4(2)).

3.    Ordinarily, the VAT security sought will be equal to the VAT outstanding and a sum equal to the VAT to cover a trading period.

4.    An appeal lies against any such decision under VATA 1994, s 83(1)(I).

5.    Where the appeal relates to a decision that security is required as a condition of a taxpayer supplying or being supplied with goods or services (VATA 1994, Sch 11 para 4(2)(b)) the FTT must allow the appeal unless HMRC satisfy the FTT that there has been evasion or an attempt to evade VAT, or that evasion is likely without the requirement for security. For the purpose of addressing whether these conditions are satisfied, the FTT’s jurisdiction would appear to be appellate.

6.    In addressing the question whether a decision to provide security is reasonable, the FTT must consider whether the ‘amount of security demanded [is] proportionate to the risk posed by the taxpayer to the revenue, having regard to the fact that the purpose of the security is not to collect … arrears’.

7.    The ordinary approach is to request a review of the decision to impose a security, whilst this would not mean that an offence had not been committed, it would be substantial mitigation.

8.    The security notice is particularly important as continuing to trade will amount to a criminal offence. If any person supplies or is supplied with goods or services in contravention of paragraph 4(2) of Schedule 11, they shall be liable on summary conviction to a penalty of £20,000. The offences in s.72(1) and (3) are triable either way (see s.72(8)); and the offences in s.72(10) and (11) are triable only summarily.

9.    The terms consent, connivance and neglect are not defined in legislation. HMRC guidance states that generally, something done with the consent or connivance of someone normally means something done with their agreement or permission, either explicit or implicit. Negligence will generally occur when someone fails to do what a prudent and reasonable person would do, or simply fails to exercise reasonable care.

10. There is a statutory time limit that applies to these proceedings:

a.     That there be no prosecution for an offence committed more than three years prior to the date the information is laid;

b.    That there be no prosecution for an offence where sufficient knowledge was before the prosecution (i.e. the CPS rather than HMRC) was more than six months prior to the information being laid.

11. The consequences of an individual being convicted of an offence pursuant to Section 72 (11) are particularly serious as HMRC are increasingly often making an application for compensation. The compensation will be equal to the amount of VAT outstanding at the time the security was issued and may extend to the additional VAT incurred during the continuing period of the offence.