Flat rate penalty to apply in all cases of VAT fraud 04.01.17 Share this item: Twitter LinkedIn Email The Government has indicated that it is proceeding with a flat rate penalty of 30% which would apply in all VAT fraud cases where the ‘knowledge principle’ is engaged. The new penalty is based on the 'knowledge principle', which prevents businesses from reclaiming VAT as input tax if they knew, or should have known, that certain transactions were connected with VAT fraud. This new penalty thus, does away with the distinction between 'known' and 'should have known' in all cases where the knowledge principle is engaged. The views of business are generally against this approach. However, HMRC believes that any ability to mitigate the penalty would reduce its effectiveness. It is thought that this is a bit short-sighted, as the lack of the ability to mitigate the penalty offers no incentive for businesses to assist HMRC with investigations. The new penalty regime will be introduced into law by legislation to be included in Finance Bill 2017 when it receives Royal Assent. Why does it matter? The form of this penalty means that any unwitting business that ‘should have known of the connection’ to the fraud, would be treated identically to those businesses that ‘knew of the connection’ and deliberately participated in it. We believe that this penalty regime is extremely harsh. However, our advice is that tax payers should take extra care, since the new penalty will apply both to the company itself, and to company officers such as directors and company secretaries. Currently, individuals can only be penalised where there is evidence of deliberate behaviour. However, going forward, the new penalty may be issued against an individual who either ‘knew, or ought to have known’, that the transactions were connected with VAT fraud. As part of this penalty regime, HMRC intends to proceed with plans to 'name and shame' VAT fraud participants where the VAT at issue is over £50,000 and there is "persistent offending or clear evidence of wrong-doing". For further information about this article please contact Thomas Mobee on 020 7556 1320 or your usual Buzzacott contact.