Company intentionally overpays VAT

Word VAT made of letter cubes
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Neil Warren investigates the case of JCA Seminars Ltd (TC06964) that deliberately overpaid its VAT, and considers how such mistakes can be corrected.

Bizarre case

The strange feature of the JCA Seminars case was that the company appears to have overpaid VAT because an employee was deliberately overstating the company’s turnover figures.

This bizarre outcome got me thinking; in all my years of working with the nation’s favourite tax, have I ever dealt with a situation when output tax was intentionally overstated rather than understated on a return? What are the practical outcomes of this scenario?

Employee fraud

The problem seems to have been caused by a fraudulent employee overstating turnover between 2012 and 2016. She was convicted in 2017. There was no detail given in the case report about how or why the employee did this and the issue is still being considered by HMRC, which could lead to VAT refunds being made. 

Method and reason

You may wonder why an employee might deliberately overstate sales. Perhaps the individual was partly rewarded by way of commission due in respect of sales. By inflating the value of sales or even inventing them, the employee would boost her own earnings (if there was no check on the process). I am only speculating on her motivation, as I’m not sure how the rising debtors figure would have been explained!

Deliberate errors

The challenge for an adviser or business owner in such a situation is to review past output tax declarations and submit the error correction form VAT652 to HMRC. Output tax is not payable on dummy sales invoices never issued to a customer. Similarly, input tax cannot be claimed on false purchase invoices.

If the net amount of VAT overpaid is less than £10,000, then surely it can be corrected on the next VAT return in accordance with the error disclosure limits? The answer here is no – underpayments resulting from deliberate action cannot be corrected on a VAT return because the £10,000 threshold is reduced to zero (VAT Notice 700/45, para 4.1, bullet point 6).

Flat rate scheme

A separate aspect of the JCA Seminars case was that the company used the wrong flat rate percentage while using the flat rate scheme for small businesses. This resulted in an HMRC assessment for £3,359, which the director appealed on the basis that HMRC should have told the company about the correct rate to use.

The director also blamed her accountant for failing to identify the error. Frankly, the chances of the taxpayer winning this argument were less than zero, but perhaps she will get some VAT back when the fraudulent sales figures are untangled.  

Partial win

The final learning point from this absorbing case is that the judge, in allowing the taxpayer’s ‘reasonable excuse’ appeal concerning default surcharges, reminded us that although a lack of funds is not an excuse for late payment of VAT, the reasons for the insufficiency of funds can amount to a reasonable excuse.

The judge quoted the case of Steptoe [1992] STC 757, where a taxpayer could not pay his VAT on time because a normally reliable customer paid him late twice due to computer problems, leaving Steptoe short of money to pay his VAT. That appeal therefore succeeded.

The judge cancelled all default surcharges issued to JCA Seminars Ltd because the employee fraud was a reasonable excuse for late payment. He recognised the “catastrophic effects on her finances of the fraud,” which was at least some good news for the director.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

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By NH
10th Mar 2019 08:35

I had a similar situation a number of years ago, a company overstated sales fraudulently in order to con the factoring company, as you say it could not last forever as the debtors just kept on rising, but in the meantime they were paying VAT and non existent sales.
When the fit hit the shan and the company went into liquidation we successfully claimed back around 35k of overpaid VAT.

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11th Mar 2019 12:07

Quote: "The judge cancelled all default surcharges issued to JCA Seminars Ltd because the employee fraud was a reasonable excuse for late payment."

Yet another example of the tax office zealously applying fines and surcharges instead of using a bit of common sense and giving the company some time to sort out its finances. In the process they wasted a lot of their time, that of the taxpayer and eventually court time as well. The reason for this is that the HMRC lack empathy and common sense, they would rather charge fines and penalties blindly even if it means that they might force the company into liquidation and get zero at the end of it all.

The HMRC have now become tyrants oppressing honest tax payers to the stage where they have nothing but total hatred and utter contempt for the tax collectors.

If only the judge would award damages to taxpayers who are harassed by the tax office in such a manner, it would force HMRC to think twice before taking tax payers to court so venomously.

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11th Mar 2019 13:02

Neil as always has a fascinating example to share. I wondered if the judge's observations (para 44 onwards of judgement) about the apparent secrecy around specific and general directions on VAT in general as opposed to direct tax (in this case extended time for use of electronic systems) might become really relevant under MTD as reference is made to directions several places in the relevant regulations

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By tedbuck
11th Mar 2019 13:05

Again Nefertiti has hit the nail on the head.
Establish a system where HMRC's incompetence renders them liable to fines and they would soon stop wasting taxpayers money harassing the homeless for money they obviously don't have.
They could also sack the nitwits who authorise the waste of resources.

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14th Mar 2019 16:16

Patisserie Valerie fraud might involve over stating of profits presumably to help staff reach bonus targets so may be similar in some ways (still being investigated)

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