You would never commit VAT fraud, right? But your business could find itself suffering because of the fraudulent actions of others with whom you have dealings.

The law says that a business can be denied the right to deduct input VAT on its purchases if it knew or should have known that those transactions were connected with the fraudulent evasion of VAT, or any other fraud. In some cases a business may also be charged a penalty where its transactions are connected with VAT fraud, or even compulsorily deregistered.

Fraud connections

The question of precisely whose knowledge was in point came up in a recent case that went to the First-tier Tax Tribunal (FTT), which found that one of the company’s salesmen knowingly bought and sold goods from businesses connected to VAT fraud. HMRC had accepted that the company’s director could not have known about the connection with VAT fraud. However, one of its salesmen had arranged transactions that showed several characteristics of fraud. The FTT concluded that he knew the supply chains were fraudulent and that, although he was neither a director nor an employee, his knowledge could be attributed to the company because he was acting as its agent. The company director had failed to make sufficient checks on the salesman’s background.

Facilitating fraud

In another case a labour-supply company lost its appeal against HMRC’s decision to deregister it because, although it had not itself fraudulently evaded VAT, it had facilitated the VAT fraud of another. The Court of Appeal held that the correct test was not limited to actual knowledge but whether the company knew or should have known that its suppliers were connected to VAT fraud.

A business is likely to have a defence against a ‘should have known’ argument if it has carried out reasonable checks to establish the credibility and legitimacy of its customers and suppliers. Consider:

• Does the customer or supplier have a history in the trade and a credit rating?
• Do the terms offered appear commercial?
• Are you being asked to make payments to third parties or offshore accounts?
• Can you be sure the goods exist?
• Are the goods adequately insured?
• Does anything look odd?

 New rules on virtual services

Avoiding fraud is not the only VAT issue facing traders; you must also keep up with changes in the rules, especially if you have any business with the EU. One recent change concerns virtual services that a UK business supplies to private individuals in the EU, such as remote training, entertainment and conferences.

The EU changed its place of supply rules on 1 January 2025 so that VAT is no longer due where the supplier company is based but in the member state in which the customer receives the service. The supplier therefore has to establish where the customer is and account for the VAT due in that state.

UK suppliers can use the Non-Union One Stop Shop, so that they only need one EU VAT registration but there is a further complication. The UK VAT rules have not changed, which means UK businesses supplying virtual services to the EU also have to account for UK VAT on the same transactions. This double taxation will affect the viability of such virtual events.