CISR85060 | CIS fraud measures: ‘knew or should have known’ principles

In order to make a determination under FA04/S62A (or FA04/S62B), HMRC would look to show that the business ‘knew or should have known’ that a payment (or credit claim) was connected to deliberate non-compliance.

‘Knew or should have known’ is not defined. It is an objective test.

When determining who ‘knew or should have known’ in relation to a corporate entity the knowledge of the officials of the corporate entity (director(s) and company secretary(ies)) as well as employees (in any capacity) and third parties (agents, advisors etc) who might have conducted or assisted in the transactions should be considered.

Rarely will direct and explicit evidence be available that the person knew payments or returns they made were connected with a deliberate failure to comply. However, actual knowledge may be inferred from a range of circumstantial evidence about the way in which the payments were made, that the person ‘must have known’ these payments were connected to deliberate CIS or PAYE compliance failures.

The test is also whether the person ‘should have known’ that the payment (or credit) was connected to deliberate non-payment or deduction of CIS or PAYE, based on the circumstances surrounding the transaction. If a person should have known the only reasonable explanation for the transaction in which they were involved was that it was connected to non-payment or deduction of CIS or PAYE and it turns out that these compliance failures did occur, then they should have known of that fact.

‘The only reasonable explanation’ does not mean that there is no other explanation, but that it is the only reasonable one. If there are any other explanations provided, these should be considered to see whether they are reasonable and credible in light of all the particular circumstances and evidence.

A person should have made a judgement based on their risk assessment that if the transaction appeared to be ‘too good to be true’ then it probably was. In such a case they should have either refrained from entering into the transaction or undertaken a more thorough risk assessment. If they ignored the risks and continued, then they should have known the only reasonable explanation for the transaction was that it was connected to the deliberate non-compliance.

It is common for supply chain fraud to involve one or more contrived transactions. Contrivance alone is unlikely to prove that the person ‘knew or should have known’ about a deliberate default. Evidence of contrived transactions can however:

• Demonstrate the scheme has a primary aim of defrauding the revenue.

• Show that defaults are unlikely to be the result of inadvertent business failure, and that they have occurred deliberately as part of a scheme to defraud the public revenue.

• In relation to if the person ‘knew or should have known’ - where it is demonstrated that a supply chain is contrived, this raises the question of how payments can be made in contrived supply chains without being aware of them