How does VAT work?

LurkerTurnedPoster

So, if I had a business, and the turnover (invoices raised including materials and labour) came to at least £78,000 I would charge 20% VAT on top of the charge?

I produce goods and services to the value of £100 pounds and give the customer an invoice for £120. I have already paid VAT on the materials which works out £10.

What happens next if I am the final person in the chain and say the thing I produced was a set of curtains and they are not selling them on?

PasturesNew

End user pays the VAT.

You buy material for £50, from a supplier who charges you VAT. Your invoice is for £60. They take your £60 and pass £10 to the Govt in their VAT return.
You sell for £100, plus VAT = £120. You take the £20 VAT, deduct the £10 you paid in VAT and you pay the Govt £10 VAT.

Govt ends up with £20: £10 taken from you by your supplier - and the £10 taken by you from your customer.

If your supplier doesn't charge VAT, you buy at £50, you sell at £120 (inc VAT) and you send £20 to the Govt in your VAT return.

However it's done, the Govt ends up with £20 VAT.

LurkerTurnedPoster

Thank you, that was brilliantly explained.
So VAT carousel fraud?

You make up some invoices and send them in and claim the made up number?

I cannot work out how someone can claim VAT they have not paid.

Quentin

You must show who you paid the VAT to in order to claim it!

That's why it should stop fraud, as there is always a paper chain for every single transaction.

POPPYOSCAR

LurkerTurnedPoster wrote: »

Thank you, that was brilliantly explained.
So VAT carousel fraud?

You make up some invoices and send them in and claim the made up number?

I cannot work out how someone can claim VAT they have not paid.

And then when you get a routine inspection(we have had 2) they go through your records, they make a note of some of the invoices, the names and address etc, and if they happen to pick up a made up one you can go to prison!!!!!

LurkerTurnedPoster

LOL PoppyOscar, I promise you I wasn't planning on doing it.
It is just that my brain can't get it on board. I saw a group of people in a newspaper that had made millions from carousel fraud. I just cant believe that it could be that easy.

I suppose it is like gambling, sending in invoices to claim the VAT, but I guess if it takes for the VAT man to check invoices come from companies that exist, and from people that exist and that the amount was paid, then that is why people have managed to get away with it.

Do they do random checks at VAT HQ and pull a bunch out and check the company exists, as well as visiting a business?

When the VAT man comes round, are they thorough, or do they just do a sample and then go away again please?

Quentin

LurkerTurnedPoster wrote: »

When the VAT man comes round, are they thorough, or do they just do a sample and then go away again please?

Yes, they are dedicated!

(And they get checked by their bosses who return to a sample of their inspections and go through them again, so they don't dare cut corners!)

POPPYOSCAR

LurkerTurnedPoster wrote: »

LOL PoppyOscar, I promise you I wasn't planning on doing it.
It is just that my brain can't get it on board. I saw a group of people in a newspaper that had made millions from carousel fraud. I just cant believe that it could be that easy.

I suppose it is like gambling, sending in invoices to claim the VAT, but I guess if it takes for the VAT man to check invoices come from companies that exist, and from people that exist and that the amount was paid, then that is why people have managed to get away with it.

Do they do random checks at VAT HQ and pull a bunch out and check the company exists, as well as visiting a business?

When the VAT man comes round, are they thorough, or do they just do a sample and then go away again please?

Yes they are.

They ask for your records for say 3 years and then spend several hours going through them.

Someone once told me that HM Customs have more powers than the police.

POPPYOSCAR

Quentin wrote: »

You must show who you paid the VAT to in order to claim it!

That's why it should stop fraud, as there is always a paper chain for every single transaction.

You must also have their VAT registration number.

LurkerTurnedPoster

From what I have read on here, to be a great HMRC employee you have to have a character which would be methodical, and get pleasure from thoroughness and having an eye for detail.

I could see that a VAT inspector could cut corners, but just the nature of the job and the qualifications it takes to get into doing that sort of thing, would mean they probably wouldn't because the job would attract someone that wouldn't cut them.

Or maybe that is just silly.

Pennywise

LurkerTurnedPoster wrote: »

I am guessing tax persons would have a high sense of fair play, and a global appreciation of economics (as in macro) and they might see themselves as like financial fishermen, going for the big carp.

Or maybe that is just silly.

In theory, we'd all like the tax inspectors to be as you describe. But in reality, they are mostly a bunch of jobsworths . I've been dealing with them for 30 years and am constantly amazed at how my experiences get worse with the passing years rather than better.

I often liken them to traffic wardens. Park with a wheel over a double yellow or be a few minutes late back to the car park, and you've got a fine, regardless of whether or not you've inconvenienced anyone or caused an obstruction. Don't bother registering your car, and no one can enforce the fines as they don't know who/where you are. If you're an ugly looking 6'6" 20 stone tattooed bloke with a vicious dog in the car, regardless of where/how you're parked, the traffic warden will look the other way - cowards.

So, be a few days late with a tax return - automatic £100 penalty. Get a payroll form wrong, it's £100 per month until you submit it properly. - Completely regardless of whether it matters in the big scheme of things, i.e. even if you owe no tax, the fines still apply.

As for tax enquiries, sadly, some tax inspectors will not look at the bigger picture and will cause a lot of fuss over trivial amounts of tax. I've had more than my fair share of idiotic tax inspectors arguing over a few pounds of tax, i.e. in the range £50-£250, where the exchange of letters etc has gone on for months. Look at some of the first tier tax tribunal rulings to see how far some idiotic tax inspectors take unwinnable and unfair cases - luckily the tax tribunals are more sensible and usually throw out the stupid cases.

Many tax inspectors are relatively inexperienced and have a tenuous grasp of tax/accounting. That means they often don't notice mistakes that would be obvious to more skilled/experienced. In one case I handled, the tax inspector asked for the "directors loan account". Now, an experienced accountant/tax inspector would see form the accounts that it was overdrawn (which causes tax/nic liabilities), the client hadn't declared nor paid the tax/nic. The inspector completely missed that it was overdrawn, even when a detailed list of the "ins and outs" and running balance was handed to them - they didn't understand "debits and credits" which are the opposite way in accounting speak to a personal bank statement, so clearly thought it was positive when it was negative.

Tax inspectors, and in particular, VAT inspectors used to be exactly how you describe. I vividly remember VAT inspectors (usually oldish blokes) come out to a business for a day, add up all the columns of figures, cross tick all the supporting invoices, and write down, in great deal, exactly what they'd done and summaries of explanations/conversations,. All very gentlemanly and very fair. Often, they'd find a few mistakes and simply tell you to include them on the next VAT return - again, no fuss, no penalties, etc. Occasionally, when they found a big problem, i.e. a systemic fault in the records or deliberate fraud, then they'd issue a formal assessment with penalties, but again, it was all very open and fair and they'd be open to counter-argument/explanation.

Sadly, these days, tax inspectors are more likely to be relatively new and inexperienced, often graduates, who seem more interested in making a name for themselves rather than showing any sense of fair play or appreciation of the bigger scheme. They're slaves to the rule book sadly.

Carousel fraud doesn't surprise me in the slightest. Tax inspectors are now attached to their desks and have little sense of reality. The VAT returns submitted may look completely normal to someone sat in an office a few hundred miles away so spends their days looking at VAT returns from large businesses all over the country. In the old days, the VAT inspectors had offices in most larger towns. They'd notice something like huge numbers on a VAT return from a "business" which they knew to be a bedsit in the wrong side of town and could smell a rate. Now, hundreds of miles away, that kind of local knowledge has long gone.

Tax returns are now "risk assessed" by computer, and then by graduate. Goodbye common sense. The criminals know how to make their false tax returns look "right" and as long as they fall within "normal" business levels, i.e. relationship of outputs to inputs, relationships of VAT to net figures, etc., they know that it's unlikely to be checked in detail.