On 5 December 2016, HMRC published its responses to its consultation dated 28 September 2016, on whether to introduce a new penalty for businesses participating in VAT fraud, specifically aimed at businesses caught up in Missing Trader Intra-Community (MTIC) fraud.

There is currently a misalignment between the MTIC fraud “knowledge principle” and the existing error penalty regime contained in Schedule 24, Finance Act 2017. HMRC currently delay issuing any penalty until after the case has been determined which can then cause a second round of litigation which increases the risk the penalty will be ineffective. The majority of respondents to the consultation were in favour of introducing a penalty for participating in VAT fraud at a ratio of around three to one.

Having considered the consultation, the government has decided to proceed with the introduction of the penalty and will legislate in Finance Bill 2017. The penalty will be imposed when HMRC denies a business the right to recover input tax or apply the zero rate to international supplies on the basis it has entered into a transaction connected with evasion of VAT by another person and it knew, or should have known, that the transaction was connected with fraud.

The new penalty will be calculated at 30% of the potential lost VAT. The draft legislation provides no reduction for cooperation. The new penalty will apply to transactions that take place after the legislation comes into force on Royal Assent.

A copy of the responses to the consultation can be found here.

A copy of the Tax Information and Impact Note can be found here.

A copy of the draft legislation (see clause 95) can be found here