Director banned for VAT fraud following due diligence failures

• The sole director of a contracting intermediary has been banned from being a company director for 10 years for fraudulently evading payment of VAT.
• The ban, effective from 11 February 2021, prohibits the director from directly or indirectly becoming involved, without the permission of the court, in the promotion, formation or management of a company.
• Although the company submitted returns totalling just over £273,000, for five consecutive quarters from January 2017 to January 2018, HMRC identified that some of its purchases had been connected to tax losses. HMRC warned the company to conduct due diligence when choosing to engage with suppliers.
• Despite this warning, the director failed to conduct due diligence checks. Liability for a further £373,000 in VAT resulted in the company entering voluntary liquidation.
• The director did not dispute that she caused the company to participate in transactions which were connected with the fraudulent evasion of VAT nor that she knew or ought to have known this (the Kittel principle). The Secretary of State accepted a disqualification undertaking from the director on the 11 January 2021.

Aspire comment:

A company director has a duty to ensure that the correct amount of tax is paid both by their own company and by others that they engage with. Despite this, the director in this case involved her company with suppliers who she knew, or ought to have known, weren’t following their obligations, a principle often referred to as the ‘Kittel principle’.

The ban proves that the consequences of failing to perform appropriate due diligence may have a bearing on your conduct as a director and emphasises the importance of carrying out extensive due diligence on your supply chain. Performing due diligence in an active and ongoing manner is the only way to have a defendable position, should HMRC raise an assessment to deny input tax on the basis of Kittel.

We are seeing HMRC apply the Kittel principle more and more often, with VAT assessments being raised, as well as penalties under the VAT Act 1994 which can be transferred to the officers of the company. Furthermore, we are seeing HMRC removing businesses from the VAT register under the “Ablessio” principle.

In this regard, there is no more appropriate time to review and enhance your supply chain due diligence process to ensure it is both “active” and “meaningful”.

Give us a call to discuss your approach to ensuring integrity within your supply chains.