Where next for VAT avoidance: cashflow arrangements? Last week’s budget was full of changes to tax and welfare spending, though only a couple of VAT changes that won’t affect many businesses.
But the Chancellor raised the issue of tax avoidance and increasing investment in HMRC’s work on non-compliance and tax evasion. So what does this mean for VAT registered businesses?
The avoidance provisions in VAT Notice 700/8: Disclosure of VAT avoidance schemes aim to prevent businesses reduce, avoid or defer VAT by using certain planning arrangements. They are primarily aimed at arrangements involving partly exempt businesses, who try to minimize their unrecoverable input tax; and retailers who try to minimize the VAT on sales to retail customers.
However I can’t help wondering whether, and to what extent, HMRC could expand the principles to include the use of certain practical planning arrangements by fully taxable businesses?
Most business owners assume that they aren’t affected by these disclosure rules because:
- their turnover is below the limit; or
- their arrangements don’t include any of the schemes or hallmarks included in the notice.
- they don’t make any exempt supplies and can claim all of their input tax
However HMRC can also review VAT arrangements used by any business if they believe that the arrangements give rise to a VAT advantage.
They could, for example, review the use of the arrangements included in Notice 700/8 by smaller partly exempt businesses or smaller retailers.
But what about VAT accounting facilities used by larger businesses that aren’t partly exempt? These include the use of monthly VAT returns to speed up VAT repayments, the VAT cashflow accounting scheme and the use of the Flat Rate Scheme, which either defer VAT payments or reduce the amount of VAT payable. But HMRC have withdrawn the use of these facilities if they aren’t being applied correctly or they are being abused.
And I can’t help wondering whether this is part of a trend that could end up affecting a lot of fully taxable businesses.
But what about the use of VAT accounting facilities by fully taxable businesses?
I’ve talked a lot about management charges and other services supplied between associated companies (see my new ebook about transactions between associated businesses which focuses on sales of services). But let’s think about how this could apply to businesses manufacturing and selling goods.
Monthly VAT returns and businesses selling goods
One of the most commonly used VAT accounting facilities is the use of monthly returns by businesses making zero-rated supplies of goods. These can include exporters, printers or residential property developers. In these situations, the business is set up so that standard rated sales of goods are made by a group manufacturing company or a group purchasing company. This company sells goods to the exporter, printer, developer etc and submits quarterly returns. The business making zero-rated sales, eg exports, printed matter and new homes submits monthly returns.
This means that the business making zero-rated sales can claim VAT charged by the associated business BEFORE the associated business has to pay the VAT on sales to HMRC.
For large businesses, the cashflow benefits of this arrangement can be significant. Usually HMRC are quite happy for monthly returns to be used in this way. They can validate the transactions because goods are tangible and it’s possible to confirm that the goods exist.
But HMRC can withdraw the entitlement to use monthly returns if they believe that the arrangements are abused; OR if there are regular problems in the business’s VAT accounting procedures .
So how could the use of monthly returns be “abused”?
Deliberate types of abuse might include invoicing in advance for goods or inflating the value of goods to generate higher VAT claims. I’ve even seen situations over the years where HMRC has challenged whether or not title in the goods concerned actually passes between the companies.
But I think it’s just as likely that they would withdraw monthly returns if the VAT accounting procedures or records aren’t up to scratch.
The important thing to remember is that HMRC have the power to withdraw the use of any VAT accounting facility if they think that it is being abused or not properly implemented.
Whether your arrangements involve the sale of goods or services, HMRC are now much more likely to examine the validity and accuracy of such transactions even if the only VAT benefit is cashflow and there is no intentional avoidance.
Marie
July, 2015