VAT Security Deposit

VAT Security Deposit

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A client has been asked for a security deposit, but has said he cannot make taxable supplies until he has paid it. He has not got the deposit, but could raise it within two months, but will have to make taxable supplies in order to do this. Is the vat man likely to agree to this. If not, are there any other options?

Replies (18)

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chips_at_mattersey
By Les Howard
29th Nov 2013 12:16

HMRC Security Deposit

You could try to negotiate a lower deposit; or you could appeal against it in principle. That will buy you some time as well.

But do note that to trade without paying such a deposit is a criminal offence!

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Stepurhan
By stepurhan
29th Nov 2013 12:19

Why required?

What is the reason for HMRC requiring a security deposit? If it is because this is phoenixing of a business that went under owing money to HMRC, you can see their point of view. If not, then there might be room for negotiation. We'd need to know the alternative reason to give advice though.

What can he get hold of immediately? It might be possible to get HMRC to accept a smaller deposit now if you can convince them that is all he has available. Having just come off the phone with Time to Pay, I wouldn't hold your breath on that one though. Very hard-line approach they were taking.

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By Malcolm McFarlin
02nd Dec 2013 12:14

Appeal

I agree with Les Howard's comments except that if you appeal the decision then there is no requirement for you to pay the 'security' while the appeal is in process since it is effectively a 'penalty'.

The submission of an appeal will buy you at least 2-3 months by which time your client would have the money.

 

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Stepurhan
By stepurhan
02nd Dec 2013 12:23

Reference please

@Malcolm McFarlin

leshoward was very clear that trading without paying the deposit was a criminal offence. You are stating that the security is a "penalty" and that the client can trade perfectly happily without paying it. Given the normal reason for HMRC requiring a security deposit, it seems wrong that simply appealing against it removes all legal restrictions and allows a previously defaulting trader to trade unfettered. I would also note that it is not really "effectively a penalty" as, whilst it does tie up cash, it is not a permanent payment. Please can you provide some reference to the legislation in support of your view.

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By carnmores
02nd Dec 2013 12:34

why they are allowed to do this is shameful

its creating a prefernce where none should exist and probably a breach of of an individuals human rights and probabaly another nail in the coffin of limited liability

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Stepurhan
By stepurhan
02nd Dec 2013 13:03

What is shameful is the same person starting over with exactly the same business and leaving the creditors of a previous business, including HMRC, in the lurch. What about the human rights of businesses that have gone under due to bad debts from a businessman who has walked away from his responsibilities? I have asked if that is the case in this instance, but have not yet received a reply confirming either way.

In a way, this is no different from an ordinary business refusing to open a credit account for a trader with a bad history. The way VAT operates means HMRC have no choice but to provide credit accounts to VATable traders. That being the case, is it really that unreasonable or even bad business practice to insist on a payment on account against that risk? I would point out that the deposit is refundable if the trader demonstrates a willingness to pay amounts as they fall due.

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By carnmores
02nd Dec 2013 13:19

we are in opposite camps

first of all it creates a preference to which i am funndamentally opposed , you have assumed that it is a phoenix but OP has not said that. it is however probable that it is so but we need to examine the facts first. i would contrast the position with that of a bankrupt who starts again immediately after bankruptcy in those circumstance do they ask for a deposit , well i have never seen such a case as it would be ridiculous. as regards HR s i wasnt aware that they extended as far as you intimate. as for a criminal sanction ridiculous has this been tested by the european courts?

 

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By carnmores
02nd Dec 2013 13:33

how many other countries

charge a security deposit i cant find it on web anyone got any idea?

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Stepurhan
By stepurhan
02nd Dec 2013 13:39

Payment up front

It is often advocated on these very forums that someone take payment up front before commencing work. This is in cases where a proposed client has history of not paying on time, or there is a good reason to think they might not pay otherwise. I am assuming that you are opposed to this practice as well, it creating the same sort of preference. If not, please explain why.

I grant that we have not had it confirmed that the OP client is a phoenix, but even you acknowledge it is likely. So, if all other suppliers can refuse to grant credit to such a trader and insist on payment as they go along, how would you suggest HMRC manage their credit risk? Insist on more frequent returns? Given that even monthly returns are due 1 month and 7 days after the month end, that is still a significant gap. Why should traders who have defaulted in the past be allowed the opportunity to do so again immediately? Is this not a case of HMRC making it more difficult for those who have a history of evading taxes to do so again, something that is often called for by accountants and clients alike.

A criminal sanction would have to be tested in the European courts, as UK law does make it quite clear that a deposit can be insisted on before making taxable supplies. This is only permitted where it is considered necessary for the protection of the revenue though. If the OP is not a phoenix, then appealing that there is no risk to revenue would appear the only avenue.

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By carnmores
02nd Dec 2013 14:07

we will disagree i am a libertarian while you

appear to be taking the position of authoritarianism, well thats your right. when i took articles in the early 70s i didnt not want to be a salesman for dodgy financial projects or wish to police client activities , now specifically to your question surely you can see the difference between an arbitrary upfront deposit and paying goods for cash (incuding VAT) which is a perfectly reasonable and sensible request. it is not creating a preference at all that is ridiculous

re my other point which other countries so levy?

 

 

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Stepurhan
By stepurhan
02nd Dec 2013 14:20

Not paying for goods

If you are taking payment up front, then you are not taking payment for goods or services because, by definition, you have not yet supplied those goods or services. Still not sure why you don't think that creates a preference though. Say I've insisted on payment up front, whereas a more trusting supplier of other services agrees to bill monthly instead. At the end of the first month, we both bill for the services we have supplied in that month. The client then does a midnight flit. Both I and the other supplier have supplied services at the same time but, by taking payment up front, I definitely appear to have received preference when it comes to getting paid.

I will grant the VAT deposit being asked for is somewhat arbitrary, but how can it be anything but? HMRC have nothing to go on other than an estimate. However, if that is a trader that has gone under owing tax before, that estimate should be based on past activity, so not just a figure pulled out of thin air.

Let's assume for the moment we are talking about a businessman who has defaulted on tax genuinely due in the past. All other suppliers can prevent debts building up by insisting on cash on the nail for everything. Debts to HMRC build up simply by the formerly defaulting businessman making taxable sales, an activity entirely outside HMRC's control. What way would you suggest HMRC mitigate the risks of default, that everyone else can protect themselves from, if not by means of a deposit?

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By aiwalters
02nd Dec 2013 15:01

the big difference

between HMRC and suppliers seems to be the fact that a relationship between a customer and a supplier is both equal and voluntary - the potential customer and the potential supplier can each make whatever conditions they like, and the other has a right to accept or refuse.

If I sell goods, and Tesco wants to buy them, but on NET 180 terms, then I have a choice; either accept it, or sell to someone else. Equally, if I insist on cash up front from Tesco, then Tesco have a choice of either agreeing, or buying from someone else. Or, we can negotiate.

One cannot, on the other hand, refuse to deal with HMRC (assuming this is not a voluntary registration). Nor can I find other "customers". Nor can one find a different government to act as an unpaid tax collector for (pedantically, he could technically emigrate).

So an accountant that charges up front - is fine, because the customer can choose not to accept it, and can go elsewhere. HMRC charging upfront is not comparable.

Incidentally, I'm not getting involved with the moral argument behind phoenixing and leaving all old debts behind. I'm just taking issue with the comparison to an accountant charging up front! 

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Stepurhan
By stepurhan
02nd Dec 2013 15:35

Contrast to Monopoloy then

I acknowledge that it is not possible to take your tax business elsewhere. This is why it is so annoying when HMRC refer to us as "customers". However, my point in making the comparison was that an accountant who did take a payment up front was receiving similar preferential treatment to HMRC taking a payment up front for VAT. The only difference, as I see it, is that the accountant is more likely to be in a position to request an up front payment that is close to the final actual cost.

That said, if there is only one supplier for a component vital to your product, then you don't have the choice to go elsewhere then either. Even taking the Tesco example, supermarkets wield so much market power they can dictate unreasonable terms a lot of the time.

If I was truly authoritarian, I would support HMRC being able to request unlimited deposits from everyone for all taxes. I do not. I only think they should be able to do so when someone has previously defaulted with them. I also think that such deposits should only be at a level sufficient to cover them in the event of a repeated default. This is just putting them in the same position of anyone else dealing with someone who has defaulted on them before. After all, even bank overdrafts and credit cards have their limits. Why should HMRC be exposed to an effectively unlimited bad debt risk? If someone can come up with an alternative way of them mitigating that risk without resorting to deposits then by all means put it forward.

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By carnmores
02nd Dec 2013 15:50

thank you for your posts elsewhere on depression

great reading, however we are not going to agree and i remain surprised that you cannot see that an upfront payment for goods does not  create a potential preference, that is madness!  :-)

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Replying to Wanderer:
Stepurhan
By stepurhan
02nd Dec 2013 16:45

Agree we can't agree

carnmores wrote:
great reading, however we are not going to agree and i remain surprised that you cannot see that an upfront payment for goods does not  create a potential preference, that is madness!  :-)
I feel the same about your position that it isn't. :-)

Agreeing to disagree is the only way forward. I think we both got good mental exercise out of it, even if we both retained the same views in the end. We can each retire from the discussion certain that the other is wrong. ;-)

Thank you for your kind words on my depression posting. I'm pleased with how it came out, given how hard it is to get those feelings across as a rule.

EDIT : Thanks to Malcom McFarlin for the clarification. Interesting study of application in reality versus the strict legal position. Presumably this would only make it worthwhile prosecuting for failing to provide a deposit if the trader did actually default.

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Replying to johngroganjga:
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By Malcolm McFarlin
02nd Dec 2013 17:49

Re: your edit

Yes I agree with your final comment. It is important as with all dealings with HMRC to keep the dialogue with them going. Those that ignore letters from HMRC do so at their peril.  Thus if David's client decides to bury his head in the sand and not respond to them then it is more likely that the next time he sees them will be when they turn up unannounced to conduct a cautioned interview and thereafter in the Magistrates Court.

Malcolm McFarlin 

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By Malcolm McFarlin
02nd Dec 2013 16:23

'L' of a case

Stepurhan

I should have said a decision rather than a penalty or an assessment.

I think you have to look at this from another angle. The VAT Act 1994 s84 Paragraph (3) states 'subject to subsections (3B) and (3) where the appeal is against a decision with respect to any of the matters mentioned in section 83(1)(b), (n), (p), (q), (ra), or (zb) it shall not be entertained unless the amount which HMRC have determined to be payable as VAT has been paid or deposited with them'.

The requirement of any security is under (l) of the VAT Act 1994 section 83 and therefore is not covered under the legislation mentioned above.

I have undertaken such cases on both sides of the fence and I'm sure by the time a review is sought of the HMRC decision to request security and an appeal, if necessary, is made David's client will have either successfully challenged the security decision, paid it or gone out of business!

Les is correct that it is a criminal offence to carry on trading -however the onus is upon HMRC to prove their case beyond reasonable doubt and it is not to a civil standard. This would require HMRC to undertake a criminal cautioned interview fully notebooked and/or tape recorded and to obtain documentary evidence that the business was still trading by either visiting customers or suppliers; uplifting till receipt or sales invoice etc. A hearing date would also have to be arranged in the Magistrates Court. All this takes time. I am not sure what a Magistrate would make of the case if he/she were to be advised that the matter had now been resolved by the time it got to Court. I doubt if HMRC would really want to prosecute such a case since it ties up their resources unless they wanted to make an example of someone.

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By carnmores
02nd Dec 2013 18:07

Truce agreed

:-)

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