What is VAT

In the UK Value Added Tax (VAT) is a tax charged on the sale and supply of goods or services during the course of business and it must be a taxable supply. A taxable supply is something which is not exempt from VAT. A taxable person is someone who must be registered for the purposes of VAT.


If your salary from employment or income from self employment is more than £70,000 a year, you will need to register for VAT. Registration for anyone else is voluntary, but in doing so there are several benefits including the recovery of tax. If an individual starts earning less than the £70,000 tax threshold, it is possible to de-register. The VAT rate in the UK is currently set at 20%.

There are two key terms that you must be familiar with when dealing with VAT. The first of these is input tax. This refers to the tax that is paid by an individual on the supply of products or services to an individual. The second is output tax. This is a tax charged by a business when it supplies a product or service.

It is very important to differentiate between the two various types of VAT which fall into several categories:

  • Standard Rate
  • Lower Rate – Applicable to power, domestic heating etc
  • Zero Rate – Books, Public Transport, Food
  • Exempt – Health, Education, Insurance or Finance

If a business provides a product or service which falls into the exempt category, they cannot charge VAT. However VAT can be spent on inputs.

Where a business fails to pay the VAT that they owe, they may be subject to civil penalties, as well as interest and a default surcharge. These penalties will be enforced under VATA and include actions such as certificates in respect of zero ratings being incorrect, evasion, questionable conduct, false or misleading declarations and breaches in relation to record keeping.

Tax Evasion Explained

When it comes to explaining tax evasion it is important to distinguish it from tax avoidance. Tax avoidance is legal, tax evasion is not. Tax evasion should be reported to the Serious Organised Crime Agency (SOCA) rather than the HMRC. SOCA will then take the necessary steps and report this to the HMRC who will make their own detailed investigations into the affairs of a business.

What is VAT evasion

VAT evasion is one of the most common type of fraud when it comes to value added tax. There are many actions which would constitute fraud including failure to register for VAT if your income exceeds the threshold, declaring more purchases than what have been made or providing false or misleading information on their return.

Tax evasion relates to intentionally not paying the correct amount of VAT which can occur in a number of ways. If you are found to intentionally evade paying VAT it is a serious offence and one that will be dealt with under Section 72(1) of the Value Added Tax Act.

If found guilty, the maximum sentence is six months in prison, but where the case is dealt with in the Crown Court, the maximum custodial sentence is 7 years and an unlimited fine which will be decided by the court.

VAT evasion is normally investigated under civil laws or it can start out as a civil investigation and then proceed to a criminal prosecution. A civil investigation will be carried out in relation to businesses that are cash based because these are the companies who can evade VAT more easily than a business where payments are all electronic and accounted for.

Even if the case is dealt with by civil means, the penalties are still severe.

Liability in Civil Cases

If your business is investigated in civil terms, the investigators will notify you that you are under investigation. To prove liability for a civil evasion, the investigators will need to evaluate your accounts in detail and prove that you failed to act in such a way or you omitted something that resulted in VAT evasion.

The investigators must also be able to prove that this omission or failure to act was intentional and dishonest.

If you are investigated for VAT evasion it is important that you seek suitable advice from a qualified solicitor or a specialist tax investigator who is experienced in dealing with these types of issues. In some situations, a penalty mitigiation may be applicable.

If this is the case, a reduction of up to 40% may be applied provided that you are open and honest about the evasion and you provide a suitable explanation about why there was a failure to declare. A reduction in penalties are also possible if you adhere to the procedures, you follow instructions and cooperate fully with the investigation team.

This will involve providing a full and accurate disclosure of records as requested. The penalty can be particularly severe it is proven that deliberate evasion took place and you could find yourself facing criminal prosecution.
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This article was written by a member of the Expert Answers legal advice team and posted by Expert Answers admin. Expert Answers provides on line legal advice on all aspects of UK Law to users in the United Kingdom.

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