HMRC Pledges To Crack Down On VAT 'Staggering' By Businesses

by Robin Pilgrim, LawAndTax-News.com, London

17 June 2005

In a statement released on Wednesday, HM Revenue & Customs announced that the tax department remains concerned about situations in which UK businesses 'stagger' their VAT accounting periods in order to gain an "unjustified and unintended cash flow benefit at the expense of the revenue".

An example of such activity is the routing of export sales through a subsidiary which is outside the VAT group, or main VAT registration. In these cases, the export company has zero rated outputs and makes monthly repayment claims. By contrast, output tax on the supply to the subsidiary is standard rated and only brought to account by the parent or other associated company once a quarter. There is, accordingly, a cashflow benefit to the corporate group.

The UK tax authority went on to reveal that:

"HM Revenue & Customs have a discretionary power in Regulation 25 (VAT Regulations 1995) to align VAT periods between the associated businesses, thereby removing the cashflow benefit. They may exercise that power by either withdrawing existing permission for monthly periods or by directing a variation to accounting periods."

"HM Revenue & Customs intend to continue to exercise this power where there is little or no commercial rationale for the VAT period 'stagger' between the associated businesses besides obtaining the cashflow advantage. They may do so, notwithstanding that the usual policy for businesses expecting to make regular claims for repayment of VAT in other factual situations is to allow monthly returns."

"There is no intention to use these powers except in cases where a significant cash flow advantage arises and there is a need to protect the revenue."

The statement concluded by announcing that:

"There is no right of appeal to the VAT and Duties Tribunal against the use of the regulation 25 powers. However, the use of the power is subject to judicial review and new guidance shortly to be issued to staff will emphasise the need for exercise of the powers to be proportionate and to take into account all relevant information."

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