Tax planning, tax avoidance or tax abuse?

This is interesting.

A special VAT scheme for small businesses just over the basic registration limit (£70,000 a year to £150,000 a year).

Getting the registration right could, for those such small businesses which don\’t pay out much in VAT upon their supplies (so lawyers, accountants, professional services, will be well at the top) lead to an increase in profits of several thousand pounds a year.

Essentially, you charge VAT in full on your outgoing invoices but pay a reduced rate (could be anything from 9-15%, instead of the full 20%) over the HMRC, but in return you cannot claim back the VAT you\’ve paid out on invoices less than £2,000. So, depending upon how much of your inputs are Vatable, you could make out pretty well here.

Now opting for such a scheme is clearly orgainising your affiars so as to (legally) reduce your taxes. So this could be anything from tax planning through tax avoidance to tax abuse.

Yet it is also clearly something that HMRC itself desires you do. They are actively promoting it: to the extent that they have a calculator which will show you how much VAT will end up as your profits.

So I think we\’d jhave to say that it\’s is in fact all three. By R. Murphy\’s strictures, this is obviously tax abuse as it reduces tax paid by playing clever with hte form of the business. It\’s tax avoidance because tax is avoided. But it\’s also tax planning because obviously HMRC wants people to do it. Heck, it\’s even tax compliance.

So why would HMRC be doing something like this, something which will reduce revenue collected?

I\’m assuming that it\’s because there are also costs to HMRC of monitoring all of these small businesses, of checking off all those minor league sets of accounts and invoices, and the loss of income will be more than made up by the reduction in collection and monitoring costs.

You know, a bit like that other scheme, the low value consignment relief. The reason that a parcel with a value of under £18 does not pay VAT upon import is because the costs of monitoring and then charging VAT on a parcel under £18 are larger than the tax which would be collected from having monitored and charged such. Cost, you will note, which do not appear in Ritchie World.

Sadly, it\’s not possible to monitor how a business is VAT registered. So we won\’t be able to really check whether this is tax compliance or tax abuse because we won\’t be able to tell whether Ritchie registers his own activities (For example, a freelance journalist could come within the \”entertainment or journalism\” category with a 12.5pc rate applying from January 4. However, a journalist who also publishes their own material and organises cultural events around the material they publish will need to decide which is their main category of business from the following options: entertainment & journalism (12.5pc); publishing (11pc); and cultural activities (9.5pc). The rate for the category chosen will then be applied to all business turnover.) under the scheme or not.

And that is, of course, the acid test. Income splitting, dividends to dodge NI, these are all tax compliance when done by some, tax abuse when done by others.

3 thoughts on “Tax planning, tax avoidance or tax abuse?”

  1. Nothing new here Tim. As a self-employed contractor who prefers to use a limited company rather than an umbrella company, the VAT scheme in question saves me a great deal of time in filling out the VAT return every quarter. It also means I’m not having to calculate how much VAT I’ve spent on small item expenses yet still pay VAT on all items/services purchased during the course of normal business.

    How Ritchie can regard this scheme as tax avoidance is beyond me.

  2. As Henry says, nothing new. The Flat Rate Scheme has been in place for years. What has changed is the headline VAT rate and the rate companies in the FRS must pay over to HMRC.

    The commenters in the DT piece who think this is some sort of fraud are confusing VAT with sales tax and don’t seem to understand that businesses can normally reclaim VAT they have paid out against the VAT they collect on their sales so they rarely pay over the whole amount they collect.
    I guess the reason HMRC like it is that it reduces the incentive to small companies of maximising expenses and reclaiming VAT on them which would not only reduce the VAT actually paid over but reduce the taxable profit and therefore corporation tax.

    It also gives companies a small incentive to actually collect and declare VAT on their sales, so reducing the incentive to do cash in hand work.
    So the FRS makes tax compliance easier and simpler.

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