Guidelines on VAT fraud create ‘unfair burden’, says tax expert

New guidelines from the Revenue Commissioners place too much responsibility on businesses to police VAT fraud perpetrated by others, according to a tax director at Deloitte specialising in VAT.

John Stewart says VAT fraud, where one company charges another VAT and fails to pay it over to Revenue, was "big business". He says it is relatively straightforward to perpetrate and has a cost to EU member states running to billions of euros.

According to EU VAT law, if a business “should have known” that it was involved in VAT fraud, it can be held liable for the VAT and possibly be made to pay penalties.

As VAT on goods in Ireland is generally at a rate of 23 per cent, the potential cost for a business can be significant. Therefore, businesses must take steps to ensure they are not an unwilling participant in transactions that could ultimately be connected with a VAT fraud, Mr Stewart says.

“Revenue has just issued detailed guidelines setting out what a business can do to avoid being penalised in this way where there is VAT fraud,” he adds.

Large liability

“Revenue’s view is that, on an ongoing basis, a business should assess the integrity of its supply chain, customers, suppliers and goods. It provides detailed examples of the actions that a business could take to avoid being party to a series of transactions connected with fraud and having to pay a large VAT liability.”

Mr Stewart says some of these place an unfair burden on legitimate businesses.

“For example, it is suggested that when setting up a trading relationship, a business could first obtain a signed letter of introduction to its business associates on headed paper; that it could establish the trade history of a supplier; that it could obtain written trade references and follow through on them to ensure that they are genuine.

“There is more. A business could obtain credit checks or other background checks from an independent third party. It could make a visit to the new partner’s premises whenever possible.

Level of policing

“These proposals would bring the level of policing by a business of its suppliers to a new level. They would add to the administrative burden on businesses, would be quite time consuming, and would add delays to the business of actually doing business.”

Mr Stewart says the responsibility for policing VAT fraud rests with the Revenue, which has the power to audit any business to ensure its compliance with VAT rules and it must not be transferred to businesses.

“In this regard, the EU court has held that businesses are not obliged to carry out checks on the other party to a transaction.”

Mr Stewart says a more appropriate test for a business could be whether, mindful of the existence of fraud, it had acted reasonably and in a manner consistent with generally accepted commercial practice in its business sector.

He says Revenue should also consider updating the guidelines to focus on the specific type of goods that are likely to be the subject of fraud, rather than suggesting checks on all transactions.

These latest guidelines would oblige businesses to develop a level of policing activity which “frankly isn’t really their business”, he adds.