16/02/09: HMRC Civil Investigations in MTIC Cases - New Public Notice: a Change in HMRC Direction?

In January 2009, HMRC issued Notice 161 to explain what will happen during a civil investigation into alleged MTIC fraud where they suspect conduct involving dishonesty (“knowing involvement”) in relevant transactions has arisen.

HMRC state within the Notice that they will normally invite the trader concerned to attend a meeting, together with their professional adviser if applicable. HMRC will provide background information on the civil investigation and will encourage the trader to disclose irregularities or other matters in relation to their tax affairs. HMRC will expect the trader to be truthful, to disclose all relevant facts and to co-operate fully in putting their tax affairs in order. False statements can result in a criminal enquiry with a view to prosecution. HMRC will invite the trader to make payments on account towards any tax arrears, both at the initial meeting and throughout the investigation.

Significantly, the Notice reveals that on the conclusion of the investigation, where HMRC consider that there are tax irregularities which are due to conduct involving dishonesty on the part of the trader, they will normally impose a civil evasion penalty on the trader, the amount of which may be as high as 100% of the tax underdeclared or overclaimed. The trader’s co-operation with the HMRC investigation may, however, reduce the amount of the civil evasion penalty due, for example by up to 40% where HMRC consider that an early and truthful explanation has been provided as to why the tax irregularities arose and the true extent of them.

At the conclusion of the investigation, therefore, HMRC may seek to recover from the trader the amount of tax underdeclared or overclaimed by way of a tax assessment; interest on that amount; and also a civil evasion penalty. It is open to the trader to request a formal Departmental review of the decisions to raise the tax assessment and/or to impose a civil evasion penalty and if necessary, to appeal the matter(s) to the independent VAT & Duties Tribunal.

It may be that the HMRC approach to civil investigations in MTIC cases as set out in Notice 161 amounts to a change in direction on their part. Since HMRC introduced their extended verification exercises with respect to the input tax repayment claims submitted by exporters (or “brokers”) in suspected MTIC cases some three years ago, they have largely disregarded the activities of the “buffer” traders in the transaction chains (who make a net payment of VAT to HMRC), other than to establish the transaction chains and to seek to prove that their transactions originated with a defaulting trader. They have instead concentrated on attempting to justify the denial of the brokers’ claims to input tax. Now, however, it is possible that HMRC may proceed against alleged buffer traders by way of civil evasion penalties where they suspect their knowing involvement in the relevant transactions. Further, HMRC action against the brokers, up until now largely limited to a straight refusal of their VAT repayment claims, may be extended to include the imposition of civil evasion penalties upon them.

It should also be borne in mind that in imposing a civil evasion penalty, HMRC are entitled to review transactions dating back up to three years; or up to twenty years where they suspect dishonest conduct on the part of the trader. In such cases, HMRC can go behind the limited liability which applies to company directors and can proceed against the directors personally, thereby seeking to secure their personal assets.

We would encourage anyone subject to such a HMRC civil investigation to seek professional advice at the earliest opportunity, as HMRC themselves recognise to be appropriate within their Notice.

Please contact us if you consider that we can be of assistance to you in any issue arising with HMRC.