Joint and Several Liability (JSL) for unpaid VAT was introduced in the April 2003 Budget in response to a rise in missing trader intra-community (MTIC) fraud.
It applies only to the supply of specifiedgoods, such as electronic goods, mobile phones, computers and related accessories.
MTIC fraud (more commonly known as carousel fraud) is the theft of Value Added Tax (VAT) by traders who exploit the way VAT is treated when trading between EU countries. The movement of goods between countries is VAT-free. Organised gangs exploit this fact to defraud HMRC of millions of pounds worth of VAT.
How does missing trader intra-community fraud work?
MTIC fraud is the costliest form of VAT fraud in the UK. To exploit the rules, the fraudster obtains a VAT registration number to purchase goods VAT-free from another EU country. These goods are then sold on in the UK to a VAT registered business at VAT inclusive prices. The UK business pays the fraudster, who then goes missing with the VAT owed to HMRC
The common features of MTIC fraud include:
• Businesses that are set up with very little infrastructure;
• The rapid growth of tax throughput and turnover;
• High-value repayments claimed in early trading periods;
• Off-the-shelf companies purchased from company formation agents;
• Transactions involving high-value goods that are small in size, like mobile phones and computer components.
There is a strategy in place for dealing with MTIC VAT fraud. Before the event, pre-registration checks are made to prevent bogus traders from registering for VAT. After the event, the joint and several liability rules can make any companies involved in the supply chain liable for the missing VAT payments.
The joint and several liability rules
Any business involved in the supply chain of goods that has been the object of an MTIC fraud can be liable to pay the missing VAT. However, the relevant person must have ‘known’ or ‘had reasonable grounds to suspect’ the VAT on the supply of the goods had not been paid.
Under the measures, a business is assumed to have ‘reasonable grounds to suspect’ VAT has not been paid if it has purchased the goods for less than their market value. Or, it has purchased the goods for less than the price paid by a previous supplier in the chain.
According to HMRC guidance, businesses that want to avoid joint and several liabilities should check the following:
• The legitimacy of customers or suppliers (e.g. their trading history);
• The commercial viability of the transaction (e.g. the existence of a market for the goods);
• The viability of the transaction (e.g. whether the goods are in a saleable condition).
If HMRC believes the appropriate checks were carried out, the joint and several liability rules will not apply to the business in question.
Joint and several liabilities in VAT group registrations
There are also cases in which two or more companies can apply for VAT group treatment. In this instance, one of the companies will register for VAT on behalf of the group, and all the companies within the group will account for VAT via this representative member. In this case, all group members are liable jointly and severally for the VAT incurred by the representative member. A company is only liable for VAT debts incurred while it was a member of the group.
Joint and several liabilities for Security Bonds (NORs)
Be aware the joint and several VAT liability can be extended from the company to the directors, company secretary, managers or any individual who is in breach of the HMRC Notice of Requirement (NOR) terms. Great care should be taken by any administrative staff member involved in the payments of VAT until the matter of the NOR is resolved. You must seek urgently and NOR experienced help – DO NOT be persuaded to simply liquidate the company prior to seeking specialist advice. This could make matters worse and is unlikely to resolve the problem as the bond can be transferred to any related, or new company. An accountant or even insolvency practitioner is unlikely to have this experience as it is a very niche HMRC area.
Joint and several liabilities in limited liability partnerships
A partnership is a trading entity made up of a number of individuals known as ‘members’. In a company insolvency situation, there is no protection for the individual members of a partnership as there would be in an LTD. Instead, the individual partners or members are fully liable for the partnership’s debts if the company cannot meet them.
All members are jointly and severally liable for the partnership’s debts. This is usually dependent solely on their ability to pay. Therefore, a creditor or liquidator trying to satisfy debts can choose to pursue the individual with the most assets. They can then ‘go after’ other members until all the debts are satisfied or all partners are made bankrupt.
Trading as a partnership can bring some benefits in terms of tax, but when things go wrong, partnerships can be extremely problematic for the members. Incorporating a fast growing partnership or one with increasing debts is well worth serious consideration.
How can we help?
If you are being pursued unpaid VAT as part of the joint and several liability rules, we may be able to help. We have extensive experience dealing with HMRC NORs, HMRC Security Bonds, and have managed many successful negotiated settlements in the past couple of months alone. For free, confidential advice on corporation tax debts, being unable to pay PAYE, or VAT issues please get in touch today.