Introduction

The offences most often prosecuted under The Value Added Tax Act 1994 (“the Act”) can be found within s.72 of the Act and it is this section I will examine in this article. 

The VAT Act itself originally emanated from European Union law, and the legal framework remains virtually entirely intact after Brexit. As such European law remains applicable and the EC Directive 2006/112/EC on the common system of VAT is still used to determine the meaning and effect of VAT law, apart from where it is specifically excluded by legislation. 

In more serious cases of VAT fraud, Prosecution Authorities often charge the common law offence of cheating the public revenue despite the fact that s72 is a statutory offence which would establish exactly the same facts. This was approved by the Court of appeal in the 1984 case of R v Mavji.

The offences under s.72 are triable either way and therefore can be tried in the Magistrates Court or Crown Court. However, the larger the sum involved, the more likely the case will have to be tried in the Crown Court. The High Court so finding in the case of Northamptonshire Magistrates’ Court, ex p. Customs and Excise Commissioners where it was found that the Magistrates Court was unreasonable to accept jurisdiction in a fraudulent evasion case involving £193,000 of evaded tax. 

Section 72 of the VAT Act

Section 72 is relatively densely worded- we will look at the whole of the legislation and then I will examine the ‘elements’ of the offence that the prosecution must prove in order to establish guilt in the criminal Courts. The legislation reads as follows: 

72. (1) If any person is knowingly concerned in, or in the taking of steps with a view to, the fraudulent evasion of VAT by him or any other person, he shall be liable—

(a) on summary conviction, to a penalty of £20,000 or of three times the amount of the VAT, whichever is the greater, or to imprisonment for a term not exceeding the general limit in a magistrates’ court or to both; or
(b) on conviction on indictment, to a penalty of any amount or to imprisonment for a term not exceeding 14 years or to both.
(2) Any reference in subsection (1) above or subsection (8) below to the evasion of VAT includes a reference to the obtaining of—
(a) the payment of a VAT credit; or
(b) a refund under section 35 or 36 of this Act or section 22 of the 1983 Act; or
(c) [repealed by the Taxation (Cross-border Trade) Act 2018, Sch.8;]
(d) a repayment under section 39;

and any reference in those subsections to the amount of the VAT shall be construed—

(i) in relation to VAT itself or a VAT credit, as a reference to the aggregate of the amount (if any) falsely claimed by way of credit for input tax and the amount (if any) by which output tax was falsely understated, and
(ii) in relation to a refund or repayment falling within paragraph (b) or (d) above, as a reference to the amount falsely claimed by way of refund or repayment.

(3) If any person—
(a) with intent to deceive produces, furnishes or sends for the purposes of this Act or otherwise makes use for those purposes of any document which is false in a material particular; or
(b) in furnishing any information for the purposes of this Act makes any statement which he knows to be false in a material particular or recklessly makes a statement which is false in a material particular, he shall be liable—
(i) on summary conviction, to a penalty of £20,000 or, where subsection (4) or (5) below applies, to the alternative
penalty specified in that subsection if it is greater, or to imprisonment for a term not exceeding the general limit in a magistrates’ court or to both; or
(ii) on conviction on indictment, to a penalty of any amount or to imprisonment for a term not exceeding 14 years or to both.

The elements of s72 VAT Act 1994-

The prosecution must prove all ‘elements’ of the case they bring, the standard is a high one, so that the jury are sure or ‘beyond reasonable doubt’. The elements are as follows:

“Evasion”
Evasion means a deliberate non-payment when payment is due. There is no need for the Crown to prove in addition that there is an intention permanently to deprive.

“Knowingly concerned”
This means that the person in question must be actively involved in the offence and must have positive knowledge of the offending. The Courts have held that for someone to be being “knowingly concerned in … the fraudulent evasion of tax” (where HMRC says that that payment is due), then HMRC must prove that tax was in fact due for the relevant period. If there is no actual tax liability then there may be a defence, this is often the subject of expert evidence. 

“Fraudulent”
This means dishonestly- if there is no dishonesty then there will be a defence available. See my guide to dishonesty for further reading

“Taking steps with a view to”
The courts have held that  “taking steps with a view to” is to be interpreted as being wider than the phrase being “knowingly concerned in” the fraudulent evasion
of tax. This therefore would cover conduct which is in the preparation of a fraudulent evasion or an attempt to do so. Somewhat surprisingly, the phrase “taking steps” would include omissions as well as positive actions: the 1981 case of R v McCarthy held that where a taxpayer failed to register in circumstances where his turnover exceeded the prescribed limit, despite this being inaction rather than action, he could be convicted under s72.

“by him or another person”
This means that the tax evaded does not have to be a personal liability of the person accused of the evasion, it may be for another or a company, as a company is classed as a ‘person’ for the purposes of the criminal law. 

Details of the s72 of the VAT Act and Carousel Frauds

Supplies of goods within the UK are subject to VAT, and therefore fall under the VAT Act unless they are subject to a total ban. So, somewhat surprisingly, the supply of counterfeit goods or the unlawful supply of anabolic steroids, although not legitimate are subject to duty and therefore will fall under the legislation.

Often persons and companies can be caught up in Missing Trader Intra Community VAT fraud which is also called a ‘carousel fraud’. These have given rise to lots of problems for the Court in respect of the position of the various parties within the MTIC chain. If you find yourself in such a position, then it is advised to gain specialist legal advice as the position can often be very complicated. The courts have held that a trader is entitled to credit for input VAT in respect of a transaction, not itself vitiated by fraud, which forms part of the chain in a VAT carousel fraud which is partly fraudulent, provided that they have no knowledge of, nor means of knowing about the fraud. However, allegations of carousel fraud may properly be brought under s.72 of the VAT Act 1994.

An analysis of Directive 77/388/EEC by the Courts held that a transaction forming part of a carousel fraud will be liable for VAT even where the trader is involved in the fraud, and though the goods which are the subject of the purported transaction may never have existed in the first place (what we lawyers call a paper fraud); what matters is the objective nature of the trade as opposed to looking at the intention with which it was carried out. So, where there is a seemingly legitimate paper trail  and where money has been transferred then the transactions are taken to be part of a trading cycle and are subject to VAT despite the wholly fictious nature of the whole carousel. 

So it follows that in any VATable situation where an invoice shows a supply of goods or services as having taken place with VAT chargeable on it, then the amount shown as VAT is due to the revenue regardless of whether the supply took place or not or whether the VAT sum was paid. 

Defences

One of the most common defences I see used in these sorts of cases is the absence of dishonesty. The prosecution must prove both that VAT was underdeclared or that records were inaccurate, and that the defendant acted dishonestly according to the test outlined above. In practice, many businesses operate in an imperfect way and the prosecution must prove that it is dishonesty rather than negligence, misunderstanding, incompetence, or poor administration rather than deliberate evasion. The distinction between careless accounting and criminal dishonesty is therefore often central.

Another recurring issue involves the reliance upon professional advice. Many individuals and companies facing s72 allegations have delegated VAT accounting responsibilities to bookkeepers, accountants, payroll companies, or financial controllers. If a defendant can put forward evidence that they acted transparently with professional advisers, disclosed relevant financial information, and followed advice given in good faith then this will often be a nearly complete answer to the allegation that they acted with dishonest intent. 

The prosecution is also often challenged and ‘put to proof’ on the aspects of their case that they have to prove. This can focus on the reliability and interpretation of the underlying financial evidence. HMRC investigations can involve fallible assumptions and analysis based on unreliable and incomplete data. In some cases, investigators may rely heavily upon gross profit calculations, bankings analyses, or unexplained discrepancies which are capable of innocent explanation. 

I will also often scrutinise whether HMRC has properly accounted for legitimate business expenses, cash flow irregularities, stock losses, unpaid invoices and alternative sources of income. It is surprising how often such an analysis shows significant weaknesses in the evidential basis of the HMRC loss calculations.

In large scale and organised VAT fraud cases, it is also worth seeing whether it is possible to challenge ‘knowledge’ and ‘participation’. The prosecution often make sweeping  allegations that a defendant knowingly participated in a wider fraudulent scheme without the evidential basis to support them. The existence of suspicious trading patterns or dishonest conduct elsewhere within a supply chain does not automatically establish criminal complicity by each defendant and the prosecution must prove that each defendant knew of, or deliberately shut their eyes to, the fraudulent nature of the transactions in question. Often defendants are unwittingly caught up in fraudulent chains and lacked any awareness of a wider fraud.

Sentence

The maximum penalty on indictment for offences contrary to s.72(1), (3) and (8) is 14 years’ imprisonment for offences committed on or after 22 February 2024 as per s.32(1) and (6) of the Finance Act 2024.

There are Sentencing Council guidelines for revenue fraud offences including fraudulent evasion of VAT.

Conclusion

Given the seriousness of section 72 allegations, early engagement with lawyers can be essential to ensure that your case is based on a solid evidential foundation. Cases frequently involve extensive financial disclosure, digital material, interview evidence, and complex accounting issues. 

Quentin Hunt is a criminal defence Barrister who has been involved in some of the largest VAT fraud cases in the country. He accepts instructions at all stages in proceedings including pre-charge and investigation phase. He believes that ‘the best way to win a trial is not to have a trial at all’ and is adept at guiding clients through the pre-charge phase in the best way so as to avoid criminal action being brought in the first place. Quentin accepts instructions both though solicitors and directly from members of the public. 

You can contact Quentin for a free, no obligation discussion about your case.