The use of ADR in challenging penalties under section 69C and 69D of the VAT Act 1994

Hanna Sandford, Manager, discusses the use of Alternative Dispute Resolution (“ADR”) in challenging penalties under section 69C and 69D of the VAT Act 1994.

VAT fraud or the evasion of VAT is a rife point of investigation for HMRC across many sectors with the recently sharpened weapon – “Known or Should Have Known” or the Kittel principle becoming a prevalent method for HMRC in tackling supply chain fraud.

The key is that there has to be a tax loss.

Where HMRC can prove;

1. There is a tax loss in a supply chain (in relation to goods or services),
2. The tax loss can be linked to the fraudulent evasion of VAT,
3. A taxpayer’s transactions are connected with that tax loss, and
4. You knew or should have known about the fraudulent evasion of VAT

then HMRC will raise an assessment denying any input tax claim relating to those transactions against the taxpayer.  

Those who attended our Penalty Webinar back in March 2021 will have heard me say this before but for those of you who didn’t attend – A Kittel Assessment does not stop there.

Transfer of liabilities

There are two penalty regimes which HMRC can use to apply a penalty (on top of the denied input tax) to the business. HMRC can also transfer the penalty to an office holder, director, or manager, which would make the individual personally liable to a financial penalty.

These are;

1. Schedule 24 of Finance Act 2007
2. Section 69c and 69d of VAT Act 1994

The penalty regime which HMRC use is dependent upon when the fraudulent transactions were carried out.

From 16 November 2017, Section 69C of the VAT Act 1994 provided a new penalty for transactions connected with VAT fraud. This was introduced via section 68 of the Finance (No 2) Bill 2017.

The penalty only applies where HMRC establishes that the business knew or should have known that its transactions are connected with VAT fraud.

HMRC VAT fraud manual VATF45131 states HMRC should aim to issue the penalty at the same time as the knowledge principle (i.e., a Kittel assessment). However, legally HMRC has a 2-year time limit to assess the penalty after the knowledge principle denial decision is issued. We have seen HMRC on occasion put the company and or directors on notice that they may intend to raise penalties.

We are seeing HMRC ramp up penalty action on the basis that the 2-year time limit is about to be exhausted.

Section 69C

The penalty is based on the amount of VAT denied or assessed under the knowledge principle multiplied by the penalty percentage rate of 30%.  It is initially issued to the company.

E.G., if £1,000 input tax is denied based on “Kittel” then the penalty would be £300.

Section 69D

Section 69D(1)(a) and (b) of the VAT Act set out that a company officer is liable to the penalty when;

1. The company which they were working for at the time of the transactions is liable to a penalty because it knew or should have known that its transactions were connected with VAT fraud pursuant to section 69C; and
2. The actions of the company which gave rise to that liability were attributable to the company officer i.e., the officer knew or should have known that the company’s transactions were connected with fraud.

A company officer is a director, shadow director (within the meaning of section 251 of the Companies Act 2006), company secretary or manager of a company, a member of a LLP or where the company is not a body corporate or LLP, any other person managing or claiming to manage any of the company’s affairs.

The Decision Notice cannot be given more than 2 years after the VAT denial decision was issued (section 69D(3)(b)).

The entire penalty issued to the company (100%), or a portion of it, can be transferred to an individual who was a company officer at the time of the transactions.

Culpability

If there is more than one company officer liable for a penalty under Section 69D, then the penalty may be apportioned between the company officers. The apportionment should consider the extent of each individual’s involvement in the transactions under consideration that were connected with VAT fraud.

Alternative Dispute Resolution (“ADR”)

Facing a personal penalty is daunting and can be expensive to defend.

But receiving a Kittel Assessment or penalty doesn’t necessarily mean that the only option open to you is to go full steam ahead with an appeal in the First Tier Tribunal (FTT).

Having lodged an appeal, Aspire can assist you in applying for ADR and going through the mediation process with the aim of trying to iron out any facts which can easily be agreed between the parties. Sometimes a conversation (face to face) can help move matters to either an amicable conclusion or at the very least will enable parties to agree the main facts in dispute.

Whilst it is not guaranteed that you will be accepted for ADR, it is definitely worth exploring the use of this process which could either diminish the need for the FTT altogether or substantially reduce the facts in dispute.