Joint and Several Liability for Unpaid VAT

The letter from HMRC names your company as liable for another business’s unpaid VAT. Not your company’s VAT, another entity’s. Somewhere along your supply chain a trading partner has defaulted, and HMRC is invoking joint and several liability (JSL) provisions to recover the shortfall from a company that had no direct involvement in the default.

JSL for VAT is a specific statutory power aimed at missing trader intra-community (MTIC) fraud in mobile phones, computers and other electronic equipment. Labour-supply defaults in construction fall under separate Construction Industry Scheme (CIS) and PAYE rules, not VAT joint liability.

Innocent parties can be caught where they knew or had reasonable grounds to suspect that VAT in the chain would go unpaid. The bar is not negligence; it is constructive knowledge, and it is real.

This page sets out the JSL framework, who can be caught, how to demonstrate you did not know and should not have known, and the practical due-diligence patterns that protect your supply chain from JSL exposure.

Many businesses caught by JSL assessments are not fraudsters themselves. They are companies that traded normally in sectors HMRC associates with evasion and had gaps in their due-diligence records.

Understanding Joint and Several Liability for Unpaid VAT

The statutory basis for VAT JSL sits in several overlapping provisions:

• Section 77A, Value Added Tax Act 1994, JSL for goods subject to missing trader fraud (the goods listed in section 77A itself: telephones, computers and computer parts such as CPUs, and other electronic leisure equipment).
• Construction Industry Scheme (CIS) provisions, which deal separately with labour-supply defaults in construction; they are not VAT joint liability.
• Finance Act 2020, Schedule 13 (JSL Notices), broader JSL regime where insolvency has been used to avoid tax.

Under section 77A, the joint liability attaches to a taxable person who “knew or had reasonable grounds to suspect” that VAT on goods supplied would go unpaid further up the chain. The wording is critical, it is not actual knowledge that is required, but reasonable grounds to suspect.

Who Is Affected by VAT Joint Liability and What Their Responsibilities Are

Primary targets of VAT JSL assessments:

• Buffer or broker companies in missing-trader fraud chains, typically the businesses one or two steps from the missing trader itself.
• Businesses transacting with connected parties where the related party has HMRC arrears.
• Specific goods traders, mobile phones and telecoms equipment, computers and computer parts such as CPUs, and electronic leisure equipment (the goods listed in section 77A).

Responsibilities once the risk is identified:

• Documented due diligence on trading partners, VAT registration verification, Companies House checks, trading history.
• Commercial reasonableness checks, pricing, volumes, payment terms matching market norms.
• Pattern monitoring, same goods circulating multiple times, implausible margins, frequent changes in supplier structure.

Common Triggers and Risk Factors for a VAT JSL Assessment

The commercial patterns HMRC reads as “reasonable grounds to suspect”:

• Below-market pricing with no commercial explanation.
• Unusual payment flows, third-party payments, circular payments, cash in atypical quantities.
• Unusual logistics, goods circulating back through supply chains, deliveries to unrelated addresses.
• New or unknown counterparties transacting in large volumes quickly.
• Missing supplier records, VAT numbers that do not verify, missing invoices, incomplete trading history.

HMRC does not need to prove your company knew. It needs to show your company had reasonable grounds to suspect VAT would go unpaid.

If you paid less than the lowest open-market price, or less than an earlier price for the same goods, the law presumes you had those grounds unless you prove the low price had nothing to do with unpaid VAT. The evidential battleground is usually what due diligence was actually performed and documented by your team at the time of the transactions.

Consequences of Non-Compliance With a JSL Assessment

Where HMRC issues a JSL assessment and the taxpayer does not pay or successfully appeal:

• Full VAT amount becomes recoverable from the jointly liable taxpayer, typically large, because MTIC chains involve substantial sums.
• Interest accrues at HMRC’s published rate.
• Penalties under Schedule 24 of the Finance Act 2007 may apply where the behaviour is careless or deliberate.
• Full HMRC enforcement toolkit, see HMRC Enforcement Action: direct recovery of debts, taking control of goods, statutory demand, winding-up petition.
• Risk of criminal investigation, particularly for MTIC cases where the evidence shows actual knowledge of the fraud.

The sums involved are frequently six or seven figures, because MTIC fraud chains move substantial VAT-able amounts. A JSL assessment can produce immediate cash-flow insolvency in an otherwise solvent business.

Strategies to Manage and Reduce VAT JSL Risk

The due-diligence patterns that defeat JSL assessments:

1. Verify VAT registration of every significant supplier and customer through the HMRC VAT validation service. Record the date and result.
2. Companies House checks, filing history, incorporation date, director history. Retain screenshots or PDFs.
3. Trading history verification, references, reasonable visits to premises, credit reports.
4. Commercial reasonableness documentation, why did you choose this supplier, what are the pricing benchmarks, what alternatives were considered.
5. Transaction monitoring, unusual patterns flagged internally, investigated, and either resolved or escalated.
6. Sector-specific protocols, the construction industry’s CIS-verification tools, mobile phone sector’s HMRC registration schemes.

The documentation itself is the defence. A JSL assessment litigated at the First-tier Tribunal turns on whether your company can demonstrate it conducted the due diligence a reasonable business in the same sector would have done. Contemporaneous records are the evidence. Directors who kept records at the time are in a far stronger position at tribunal than those relying on memory.

Appealing a VAT Joint Liability Assessment

Route of appeal:

• Review or appeal within 30 days of the date of HMRC’s notice: either ask HMRC for a statutory review by an officer not involved in the decision, or appeal directly to the First-tier Tribunal.
• After a statutory review, you have 30 days from its conclusion to appeal to the tribunal.
• First-tier Tribunal (Tax Chamber), specialist VAT litigation, often large amounts at stake, specialist representation strongly advised.

Grounds for appeal turn on whether your company had reasonable grounds to suspect that VAT would go unpaid. Your documented due diligence, evidence of commercial reasonableness, and clean transaction records defeat the assessment. Gaps in any of these make the defence harder.

When VAT JSL Forces Insolvency Decisions

A six-figure or seven-figure JSL assessment on an otherwise solvent business can produce immediate cash-flow insolvency. If you are facing a disputed assessment while payment is demanded pending appeal, your business may need to take formal-process decisions in parallel. Our licensed IPs have handled exactly this combination, running insolvency modelling alongside tax counsel working the appeal.

Options:

• Administration, a statutory moratorium on enforcement while an administrator works to rescue the company or get a better result for creditors; the administrator, not the directors, then controls the company and its appeal.
• CVA, where the assessment is accepted but quantum is to be paid over time.
• CVL, where the assessment is upheld and the business cannot service it.

Your Next Step on a VAT Joint Liability Assessment

Tax counsel fights the appeal; insolvency counsel protects the business while the appeal runs. Both calls are needed, usually on the same day:

1. VAT specialist solicitor or tax adviser with JSL experience, to prepare appeal on due-diligence grounds.
2. Licensed insolvency practitioner, to model cash-flow impact and formal-process alternatives.

Our licensed IPs and business rescue specialists can assess the cash-flow implications of the JSL assessment, coordinate with VAT counsel, and implement formal process where appropriate. Call us free on 0800 074 6757 for confidential advice.

FAQs on VAT Joint and Several Liability