VAT Inspection
Discussion
I've just been put on notice by HMC&E for a "routine inspection" in about 6 weeks that is to be booked to take 2 days! Now in 9 years I've never had one and so I guess it's well overdue, but lets be honest I've never heard any good reports about people having these and I've never heard anyone say "they saved me loads of money" Put bluntly I'm shitting myself now, I've not been on the fiddle but I will confess to being "slack" and a bit hap hazard with the way I deal with it all normally, anyone know what's expected and what they generally go for, look at in depth??? They have said they will send a letter with details of everything they need but I'm just filed with dread already.
Red V8 - are you intimating that he should blame his accountant for any VAT errors that the Inspector might find?
For a start, the VAT man will not be concerned about who made the errors, only that the errors are rectified and not repeated.
If it did turn out that an accountant gave duff advice (not unheard of), the client's only recourse would be to seek financial compensation directly from the accountant. That could only really be obtained if the client can be seen to have suffered a financial loss. Paying your correct amount of taxes would not be considered in a court as a "financial loss". The only element of tax arrears that would be considered as a loss would be interest and penalties charged on late payments of tax.
For a start, the VAT man will not be concerned about who made the errors, only that the errors are rectified and not repeated.
If it did turn out that an accountant gave duff advice (not unheard of), the client's only recourse would be to seek financial compensation directly from the accountant. That could only really be obtained if the client can be seen to have suffered a financial loss. Paying your correct amount of taxes would not be considered in a court as a "financial loss". The only element of tax arrears that would be considered as a loss would be interest and penalties charged on late payments of tax.
Hi Eric, not at all... and I fully agree with you that the accountant is not the one liable for VAT and/or mitigation in any way if errors are found (it's been tried a thousand times, and all to no avail!). However, as the VAT man will be looking to reconcile input and output tax along with assets and liabilities from sales and purchases amongst other things... i.e. the terminology used by HMRC is often confusing to the small businesses, my suggestion was merely to ask for advice from his accountant (to explain the audit process and terminology) in anticipation of the visit from HMRC... Is this something you get asked for by your clients?
In an indirect way, I suppose.
Most queries are on the basis of "can I claim back the VAT on this purchase?"
Often they are not so much queries as me spotting problematic situations in advance - hopefully resolving them before any VAT Inspections arise.
Classic errors surround misinterpretation of the fundamental differences vetween "Zero Rate" VAT items and "Exempt from VAT" items. If someone has got this wrong, particularly in regards to their Sales/Income, it can have serious consequences under the "Partial Exemption" Input VAT claim rules. I've seen one client pay dearly for getting this wrong (not my fault, I hasten to add).
Smaller sole traders often get confused about how they should bill their "Expenses" and as a result forget about the VAT consequences.
Most queries are on the basis of "can I claim back the VAT on this purchase?"
Often they are not so much queries as me spotting problematic situations in advance - hopefully resolving them before any VAT Inspections arise.
Classic errors surround misinterpretation of the fundamental differences vetween "Zero Rate" VAT items and "Exempt from VAT" items. If someone has got this wrong, particularly in regards to their Sales/Income, it can have serious consequences under the "Partial Exemption" Input VAT claim rules. I've seen one client pay dearly for getting this wrong (not my fault, I hasten to add).
Smaller sole traders often get confused about how they should bill their "Expenses" and as a result forget about the VAT consequences.
Absolutely agree... the biggest VAT issue I came across involved someone assuming that VAT could be reclaimed for EC sales to EC customers without VAT numbers... a very simple mistake, but one that ran to many tens of thousands of pounds in unpaid VAT... needless to say HMRC didn't accept 'I didn't know the rules regarding EC sales' as mitigation for this either. It's the traders responsibility to read and understand the VAT rules... as complicated as they can seem, and as you say, that's where a good accountant can help.
Not exactly sure what you mean by that.
If you are selling goods or services to customers in other EU countries, you are obliged to CHARGE and DECLARE VAT on your own sales to them UNLESS you can prove that the EU customer you are selling to is VAT registered in their own EU country.
If you are selling goods or services to customers in other EU countries, you are obliged to CHARGE and DECLARE VAT on your own sales to them UNLESS you can prove that the EU customer you are selling to is VAT registered in their own EU country.
You don't expect people to own up to a crime on an internet forum, do you?
I have to say though that a client I was dealing with many years ago was convicted of a VAT/Corporation Tax and PAYE/NI fraud (you might as well get hung for a sheep as a lamb
).
He had to pay underpaid taxes of over £300,000 plus penalties and interest and received a six month jail sentence although the jail sentence was suspended.
I also know of an individual who received a one year jail sentence (NOT suspended) for a serious VAT fraud relating to imports and exports.
Since those days additional laws has been enacted (the Proceeds of Crime Act and the Money Laundering Regulations) which would probably result in serious tax fraudsters being prosecuted under those pieces of legislation too.
I have to say though that a client I was dealing with many years ago was convicted of a VAT/Corporation Tax and PAYE/NI fraud (you might as well get hung for a sheep as a lamb
). He had to pay underpaid taxes of over £300,000 plus penalties and interest and received a six month jail sentence although the jail sentence was suspended.
I also know of an individual who received a one year jail sentence (NOT suspended) for a serious VAT fraud relating to imports and exports.
Since those days additional laws has been enacted (the Proceeds of Crime Act and the Money Laundering Regulations) which would probably result in serious tax fraudsters being prosecuted under those pieces of legislation too.
The scam was this:
He always had a purchase invoice to substantiate all business expenses which, on the face of it, revealed that everything was hunky dory.
Obviously, with a purchase invoice, he had an invoice to match against the subsequent corresponding bank payment to that supplier.
And, of course, with a purchase invoice, he could claim back the Input VAT on the cost.
However, on some occasions the original purchase invoice was "missing" and a photocopied duplicate was in its place.
When asked why there was no original, the "reason" was the the original was either lost and a duplicate had been sent to replace it or the original invoice had been disputed and then replaced by a different invoice.
I was suspicious that all was not in order and asked to see the suppliers' statements. He never allowed me to see these on the pretext that he never retained them and they were therefore not available for inspection.
Of course he had real reasons why he didn't want me to see the suppliers' statements.
The photocopied invoices were actually forgeries - made on his own photocopier using genuine supplier invoices as a "master"..
An examination of the suppliers statements would have revealed that these "duplicated" invoices didn't really exist in the suppliers' own records..
With these false invoices going through his records, the business costs he was claiming in respect of those invoices were not real. He was therefore depressing his actual trading profits and reducing the company's tax liabilities on the those artificially reduced profits.
The bank payments to "settle" these fake invoices were actually payments to himself, not the suppliers. He was writing the suppliers' names in the cheque stubbs rather than the real payee, i.e himself.
As he was a director, he was therefore drawing money from his own company without processing it correctly for PAYE and NI purposes or declaring it for tax purposes as a dividend.
Obviously, he was claiming back VAT on these false invoices too.
Therefore, he was committing a Corporation Tax fraud by depressing his profits.
He was committing an Income Tax and National Insurance fraud by not declaring PAYE and NI on his hidden "salary".
He was committing a VAT fraud by claiming the Input VAT on these fake invoices.
He had a few other tricks as well which all fell out in the wash when he was investigated by the Revenue.
>> Edited by Eric Mc on Tuesday 30th May 20:17
He always had a purchase invoice to substantiate all business expenses which, on the face of it, revealed that everything was hunky dory.
Obviously, with a purchase invoice, he had an invoice to match against the subsequent corresponding bank payment to that supplier.
And, of course, with a purchase invoice, he could claim back the Input VAT on the cost.
However, on some occasions the original purchase invoice was "missing" and a photocopied duplicate was in its place.
When asked why there was no original, the "reason" was the the original was either lost and a duplicate had been sent to replace it or the original invoice had been disputed and then replaced by a different invoice.
I was suspicious that all was not in order and asked to see the suppliers' statements. He never allowed me to see these on the pretext that he never retained them and they were therefore not available for inspection.
Of course he had real reasons why he didn't want me to see the suppliers' statements.
The photocopied invoices were actually forgeries - made on his own photocopier using genuine supplier invoices as a "master"..
An examination of the suppliers statements would have revealed that these "duplicated" invoices didn't really exist in the suppliers' own records..
With these false invoices going through his records, the business costs he was claiming in respect of those invoices were not real. He was therefore depressing his actual trading profits and reducing the company's tax liabilities on the those artificially reduced profits.
The bank payments to "settle" these fake invoices were actually payments to himself, not the suppliers. He was writing the suppliers' names in the cheque stubbs rather than the real payee, i.e himself.
As he was a director, he was therefore drawing money from his own company without processing it correctly for PAYE and NI purposes or declaring it for tax purposes as a dividend.
Obviously, he was claiming back VAT on these false invoices too.
Therefore, he was committing a Corporation Tax fraud by depressing his profits.
He was committing an Income Tax and National Insurance fraud by not declaring PAYE and NI on his hidden "salary".
He was committing a VAT fraud by claiming the Input VAT on these fake invoices.
He had a few other tricks as well which all fell out in the wash when he was investigated by the Revenue.
>> Edited by Eric Mc on Tuesday 30th May 20:17
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