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Supplier workaround created huge VAT bill

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A goods importer tried to get around a supplier dispute by inserting two new businesses in the chain, but ended up with a bill for £730,543 for disallowed input tax and penalties.

8th Sep 2020
Independent VAT Consultant
Columnist
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Imagine the following situation: you import goods from China and sell them in the UK. You rely heavily on one particular delivery company to deliver them to your customers. But you’re in dispute with this supplier, who has stopped trading with your business. You, therefore, decide to get a friend to set up a limited company and create an account with the supplier.

The friend sets up the account and gives you the log-in code for the account so you can operate as you did before the dispute happened with the supplier – ie the deliveries continue. The friend’s company is VAT registered; the delivery business invoices your friend’s company (plus VAT); the friend’s company raises an invoice to you for the same amount (plus VAT). You claim input tax on your VAT returns. Is there a VAT problem?

What is a business?

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Replies (7)

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By BryanS1958
09th Sep 2020 10:04

Seems very unreasonable if there was no loss of revenue to the VATman!

Thanks (1)
Replying to BryanS1958:
By djn24
09th Sep 2020 11:01

BryanS1958 wrote:

Seems very unreasonable if there was no loss of revenue to the VATman!


I agree that it seems very unreasonable.
Thanks (1)
Replying to djn24:
By Nick Graves
09th Sep 2020 11:35

djn24 wrote:

BryanS1958 wrote:

Seems very unreasonable if there was no loss of revenue to the VATman!

I agree that it seems very unreasonable.

It's worse than that - for the want of a properly-completed paper chain, the guy has been robbed of his profit by the state.

Seems VAT-fiddles cut both ways...

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By Malcolm McFarlin
09th Sep 2020 12:17

Does this mean the friend who acted as a supplier has charged output tax which HMRC say he should not have done as it is not a taxable supply can claw it back from HMRC or will HMRC rely on the fact that they keep the money since it is recorded as 'VAT' on the invoice and they can recover the VAT under VATA 1994 Schedule 11 Para 5(1)-(3). This provision enable HMRC to recover 'VAT' charged on an invoice whether or not the supply has taken place. A case of having your cake and eating it.

It seems highly unfair. But beware the perils of taking an appeal to the tribunal where the prospects of success are about 15% these days.

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By Malcolm McFarlin
09th Sep 2020 17:50

As a further thought the company may be able to negotiate with HMRC that the penalty is suspended since it is now careless and not deliberate. However the HMRC Factsheet CC/FS10 states HMRC will not suspend a penalty if it the company attempted to use a tax avoidance scheme.
A grey area since it was not a tax avoidance scheme as such and must be worth a go.

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By Richard Grant
10th Sep 2020 17:28

The intent was obvious, to facilitate business, there was no attempt to conceal or under pay.
A very poor decision and a kick in the teeth for someone working hard to supply goods to this country. It's no wonder their accounts are now overdue, their net worth in 2016 was only £144k. A total wipeout. No doubt there are a couple of very smug agents patting each other on the back and looking forward to telling their grandchildren how they got the bad guys!

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By sammerchant
12th Sep 2020 17:30

For Neil: Would it have made a difference if the go-betweens had charged a small commission, say 1 or 2% on the transactions and then charged VAT on the grand total?

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