Out-Law News | 29 May 2019 | 12:00 am | 1 min. read
"Businesses involved in purchasing GOs need to carry out robust due diligence to avoid being caught up in VAT fraud and suffering significant financial loss. It is essential that businesses take action in response to these risks. Any enquiries raised by HMRC in respect of GO trading should be handled with care," said Stuart Walsh, a VAT disputes expert at Pinsent Masons, the law firm behind Out-Law.com.
Electricity suppliers in the UK must disclose annually to customers and potential customers the mix of fuels used to generate the electricity they supply. This must be backed up by evidence in the form of EU GOs, referred to as renewable energy guarantees of origin, or 'REGOs', in the UK. GOs can be traded separately from the electricity they relate to.
GOs purchased from suppliers in another EU member state will be zero-rated for VAT purposes. When on-sold in the UK they are subject to VAT at the standard rate. GO trades can be used to defraud HMRC of VAT by fraudulent traders buying the certificates from another EU member state VAT-free, onward selling to UK purchasers charging VAT but then failing to pay that VAT to HMRC. This is called missing trader intra-community (MTIC) VAT fraud.
"Anyone who purchases GOs either directly or indirectly from a fraudster could find that HMRC refuses to allow them to recover the VAT they have paid to their supplier and could be subject to penalties," said Clara Boyd, an MTIC disputes expert at Pinsent Masons.
It is essential that businesses take action in response to these risks. Any enquiries raised by HMRC in respect of GO trading should be handled with care.
Input tax recovery can be denied by HMRC where a business 'knew or should have known' that the purchases it made were connected with the fraudulent evasion of VAT.
"Another risk to businesses purchasing GOs is the potential for fraudulent companies which have subsequently passed into liquidation to bring a civil claim against them for 'dishonest assistance' in defrauding HMRC. The sums claimed tend to be broadly equivalent to the VAT amount that the fraudulent company defaulted on paying to HMRC, potentially doubling the financial exposure to the business. In these circumstances, dishonesty can mean 'turning a blind eye'," Clara Boyd said.
Missing trader fraud began with physical goods such as mobile phones and computer chips, but in recent years it has spread to the financial services and energy sectors. The current allegations in respect of GO trading bear many similarities to the VAT fraud that affected the carbon credit market in 2009, which reportedly resulted in billions of pounds in lost VAT.
"The volume and value of the transactions can very quickly create significant VAT exposures for businesses inadvertently caught up in a VAT fraud. Businesses involved in the trading of GOs should therefore carry out a risk assessment of their potential exposure to missing trader fraud and review their due diligence procedures as a matter of urgency," Walsh said.
Potentially exposed businesses will need to put in place clear policies and processes, provide training and guidance for staff, and ensure that robust reporting lines and record keeping are maintained, he said. This is to ensure the business is best placed to identify and respond to any warning signs; and is able to demonstrate to HMRC that they have taken reasonable steps to verify the integrity of their supply chains. Such action will also assist in defending against any allegations of dishonest assistance brought by any liquidated companies.
Although there are time and cost implications associated with reviewing, and if necessary bolstering, due diligence and monitoring procedures, such investment may be considered minor if it affords businesses an enhanced level of protection against the referred risks.
Particular care needs to be taken in relation to due diligence on sellers who are new to the market. However, it is not only at the supplier take-on stage that red flags can be identified, Walsh said. Businesses are required to monitor their relationship with suppliers and customers on an on-going basis.
"As well as the referred financial exposures risks, businesses that are unintentionally involved in supply chains affected by VAT fraud can find themselves embroiled in lengthy and resource intensive investigations and, ultimately, disputes with HMRC," Boyd said." Accordingly, although there are time and cost implications associated with reviewing, and if necessary bolstering, due diligence and monitoring procedures, such investment may be considered minor if it affords businesses an enhanced level of protection against the referred risks".
02 Aug 2012