Would you like to turn £120 into £46,440?

One way of doing it, would be placing a bet on a horse at 386-1 but, for most of us, it’s a bit of a stretch.

But HMRC managed it recently in a VAT investigation that was approved following a tribunal.

It’s one of those cases that really illustrates the need to get your VAT right…and to declare it.

The case involved a haulier, Sean Convery, who submitted £nil VAT returns for 3 years. HMRC wanted to look at his records to check this, but he wasn’t too helpful and didn’t send anything.

As part of a separate investigation into one of his customers, they found two sales invoices from Sean Convery. Each sales invoice was £300 plus VAT, ie a total of £120 of VAT.

Therefore, HMRC now knew that Mr Convery should have been paying VAT to them. So, how did they get to £46,440?

Sequential invoices

They looked at the dates and the invoice numbers. Legally, your sales invoices must be sequentially numbered.

The first invoice was Invoice 20141 dated 12 February 2015 and the second was Invoice 20268 dated 4 March 2015.

Therefore, on average, the haulier raises 43 invoices per week.

Size of invoices

They then looked at the amount of VAT on each invoice. There was £60 on each of the invoices they had discovereed, and they actually took a relatively “kind” view that the average VAT per invoice would only be £30, ie half of that.

Total Output VAT

If there are 43 invoices per week with £30 of VAT each, and 48 working weeks in a year, that leads to Output VAT of £61,920 per annum. They were officially investigating 5 quarters of VAT, so the total was £77,400.

Estimation of Input VAT

A business can reclaim input VAT, ie the VAT on its purchases.

To allow for this in this case, HMRC used the average percentage for somebody in the haulier business, as calculated for their Flat Rate VAT scheme.

The Flat Rate VAT scheme is usually used to simplify VAT for businesses and uses a calculated industry standard percentage for the VAT due as a percentage of gross sales. Therefore, HMRC already had an agreed rate of 10% of gross sales for this industry, ie the average VAT payable is 10% of gross sales.

Based on the Output VAT calculated above, the gross sales for the period would be £464,400.

And, so, the VAT due to HMRC was 10% of this – £46,400.

Now this is a totally logical process and, if anything, could be argued to understate the VAT. Of course,

Mr Convery felt otherwise. He first claimed that they weren’t his invoices. He then claimed that the £120 was the total VAT in the period and that he shouldn’t even need to pay that as he could reclaim some input VAT.

The judge disagreed and HMRC won the tribunal.

What can we learn?

As always, it is best to get your VAT right. And to declare it. You can’t hide from the taxman, even while you might think they’re busy with coronavirus grants and furlough claims.

If you are open, honest and declare everything, there’s nothing to be worried about. If you’re trying to hide things from HRMC though, they will track you down.

If you have any questions at all about VAT, please get in touch and we can sort it out.

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Any questions?

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