I’m often asked if it’s okay to “do it this way” to avoid a VAT liability. More recently, a potential client with a potential £80k liability said “I’ll pay you if you can find a way out of this VAT cost”. This was not a grey area – the company had simply not properly understood the rules when they started the property development and had claimed VAT incorrectly. While I’m good at identifying potential savings in VAT, this doesn’t extend to helping a business trying to avoid a correct VAT cost.
Being a VAT consultant sometimes feels as though you’re working on a very narrow step between what is legal; i.e. tax planning; and what isn’t legal; i.e. or tax avoidance. Nobody likes having to pay VAT; it’s tax at the end of the day and we all have to pay tax. And after many decades of caselaw and disputes, it seems that, for the most part, businesses now understand the distinction between planning and avoidance.
The best way of differentiating between the two is to remember the fundamental basis of VAT; i.e., it’s a transaction tax on supplies of goods and services. Unlike corporation tax or income tax, the liabiility to VAT is established when the sale of good or services occurs. You can’t review things at the year end and decide to reallocate or redefine a transaction for the purposes of calculating profit for tax purposes. So why is it that some of the most common queries are:
- Can we raise a management charge to claim VAT on our legal costs? The answer is no unless the charge represents an actual supply of services.
- Is it okay if we put the charge through Co B to avoid a VAT cost in Co A? Again the answer is no because the VAT liability is based on the “chain of supply”; in other words who is doing what for whom or what does the contract say?
These sorts of queries are always going to come up from time to time, especially if the personnel involved have only limit knowledge of VAT. But in practice, these ideas – if implemented – are VAT fraud.
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Here’s the thing about VAT: it’s a transaction tax which means that the VAT liability depends on the nature of goods and/or services and the parties involved. It’s a tax on the supply (i.e. sale) of goods or services made by a VAT registered business, or a business that is liable to register for VAT. Every single commercial transaction is, by default, liable to VAT at 20% unless the law says otherwise.
And, as I’ve said on many occasions, HMRC is particularly good at identifying potential “avoidance” on transactions between associated businesses, even if the purpose wasn’t to avoid VAT. You can’t just “raise” a management charge and issue a VAT invoice unless your business has supplied management services. And you can’t avoid VAT on costs by routing transactions to different group companies or associated businesses. You have to follow the “chain of supply”.
I know that I repeat myself on this sujbect, but I’m just surprized that some business owners think that it might be okay to falsely report their VAT liability, whether it’s by claiming too much, charging too little or issuing fraudulent invoices.