Do VAT inspectors understand VAT regulations?

BlueVinney

A bit tongue in cheek this but I've had two experiences over the past few days that make me think.

1. The same enquiry of 2 different Inspectors gave opposite opinions. The final advice was to proceed but risk having the considerable additional costs of being assessed as following the wrong procedure and having to go to appeal. This would lead to the cost and cash flow impact of immediate payment of any potential unpaid VAT (even if the decision eventually went in my favour) plus work and representation for the appeal.

2. Talking to an acquaintance who works in C&E about another VAT matter, he was appalled that I was trying to organise the business to avoid paying VAT. He linked avoidance with evasion as being equally evil and it appeared that was the general attitude within his office. I fully support the position that evasion is illegal but want only to pay the amount legally required, so avoiding paying unnecessary costs. Maybe it's just the amount of evasion going on in the 'underground' economy that makes them feel that way.

Can anyone help with both these points.

Is there any good advice available on VAT that will get a decision without a potentially large bill to me if that decision is wrong?

Has anyone else found that there is no distinction between avoidance (legal) and evasion (illegal)?

Thanks

Pennywise

There is a clear legal distinction between tax avoidance (legal) and tax evasion (illegal). It is a long held principle in the courts and to paraphrase a judge (I can't remember the case) he said it was a person's right to structure his affairs in order to pay the least amount of tax via legal methods.

Legal tax avoidance would include such things as trading as a limited company instead of a sole trader, paying your spouse a reasonable amount for the work they do in your business, tranferring your savings into your spouse's name so the interest could be taxed at their lower tax rate than yours, voluntarily registering for VAT to claim legitimate refunds when you're turnover is under the VAT threshold, etc. As long as what you are planning does not involve dishonesty or fraud in any way, you should be ok.

Illegal tax evasion would include such things as your turnover exceeding the VAT threshold without registering for VAT, pocketing money from your customers instead of putting it through the books, claiming to trade from the Isle of Man when you really trade in Skegness. For evasion, you need an element of dishonesty, fraud, etc.

An excellent example of legal tax avoidance I heard of (although never actually confirmed formally) is Sky TV. If you just paid your £30 pm. for Sky TV, it would be all VATable, so Sky would lose 7/47th of the income, but by sending you a magazine every quarter, they can apply some (or all?) of the monthly subscription to the magazine which is zero rated, so they can save some VAT. Another example is the credit card surcharge operated by the large retailers - by telling you 2.5% of the total (if paid by card) goes to a credit card handling company, they don't pay VAT on that 2.5%. The list goes on. Of course HM Revenue & Customs don't like this, but that is only there opinion - and they seem to be on a losing streak in the courts when they take this type of thing on.

Some real life recent personal experiences may help clarify. The HMRC don't like "artificial" separation of businesses - for example where a husband and wife run a pub, and they claim the pub is the husbands and the kitchen is the wife's, so the wife is trying to avoid losing the VAT on the food. This is a classic area targetted by the VAT men - likewise chains of launderettes, when the same person owns several launderettes, but one is a sole trader, another a partnership with his wife, another his wife as sole trader, yet another a partnership with his brother, and so on.. A third example is taxis, where husband owns a taxi, wife owns another, adult son owns a third, husband and wife in partnership with a fourth etc. I had clients with each of the above scenarios and in each case the VAT man wanted his pound of flesh arguing they weren't separate businesses at all and should be VAT registered. By quoting THE LAW back to them, rather than allowing them to claim their biased publications were as good as law, I successfully defeated the VAT men's claims in EVERY Case as we had already put in place all the necessary formalities to show each business was indeed a separate entity.

Tax Inspectors are not above the law - and I would also agree with earlier comments about the customer service advisers who have even less of an idea what the law really says. If you can arrange your affairs in a legal and honest manner and what you do in real life mirrors what you claim to happen, then you have no problems and IT IS NOT ILLEGAL TAX EVASION!

santana-mx3

Very interesting post Pennywise. I used to wonder about the artificially high "cover price" of the free Sky magazines and also what the real deal was with the card services tag line on shop receipts.

LittleWoman_3

Pennywise wrote:

There is a clear legal distinction between tax avoidance (legal) and tax evasion (illegal). It is a long held principle in the courts and to paraphrase a judge (I can't remember the case) he said it was a person's right to structure his affairs in order to pay the least amount of tax via legal methods.

A lot of the current cases going forward at the moment seem to be the HMRC's attempt to overturn at lot of the long held principles, including the one mentioned above. So far they have lost the majority of cases, but their attempt with the "Arctic Systems Case" which is now going to the House of Lords on appeal could cause a few problems. Hopefully the HMRC will lose here too.

A number of companies have agreed to pay money into closed final salary pensions schemes to make sure there are enough funds to pay the pensions of the members who will be claiming in the future. And what does the HMRC do - they are suggesting they are not going to allow the companies to claim the money as a business expenses, and as they consider the "companies are trying to avoid paying their far share of taxes".

In one budget a few years ago, the "Company Bicycle" was introduced to replace "Company Cars". What did they HMRC do - admitted they would tax it, unless the user could prove they never used it for "private use"!

Pehaps the HMRC need to change their views and join the real world.