There’s part of Ritchie’s tax gap

The taxpayer stands to lose £78m from the controversial demise of Phones 4U, new documents show.

The high street retailer owed £69.2m in VAT and £8.8m in corporation tax when it collapsed in September, and administrators have warned they are only likely to recover a tiny fraction of the debt.

The debts to HMRC are part of £168m owed to unsecured creditors by Phones 4U. Less than 0.4pc of this will be repaid – the equivalent of £672,000 – according to PwC, the administrators.

 

And yes, really, Ritchie does count tax owed by businesses that have gone bust as part of his tax gap. He even fulminates about how writing off this sort of debt shows that there aren’t enough taxmen who are all paid too small an amount of money.

 

Ho hum

13 thoughts on “There’s part of Ritchie’s tax gap”

  1. There is one way that HMRC could collect more of that tax: increase the collection frequency. VAT is payable quarterly; if it was made monthly or fortnightly then a company wouldn’t go bust owing three months’ worth of tax.

    In our digital age, the cost of collection shouldn’t be much higher; particularly for large companies with half-decent accounting IT systems. Small businesses could retain quarterly payments.

    Sadly for Ritchie’s paymasters, this would require neither more staff nor higher-paid staff.

  2. It does (unusually) absolutely fit in with Richies narrative though.

    Vodafone are apparently tax avoiding scum and this is the only factor that can ever be associated with the company.
    Vodafone pulling out of phones4u triggered the collapse.

    QED this loss of VAT and PAYE arose solely and directly due to tax avoidance.

  3. It is payable monthly for many businesses. Once you get over a certain size HMRC make you pay monthly instalments based on estimated liabilities, and then true it up when you submit your return. Phones 4U will have been in that regime.

  4. Let’s be honest, it isn’t just part of Ritchie’s “tax gap”, it is part of the official “tax gap” too. It is just one of those parts that are declared “not practically recoverable.”

  5. I’m having a bit of a problem reconciling the numbers here.

    The group turnover was 1.2 billion (about).

    Thus the annual VAT liability would be about £300 million.

    One month’s VAT should be about £25 million. But the liability is nearly £70 million.

    ? Or is it just too early and I’m being thick here?

  6. SE is quite right
    And it shows us that we shouldn’t try to or wish to recover a part at least of the tax gap

    Andrew M is also spot on in noting that increased interaction with HMRC, thanks to IT advances, actually mean FEWER staff.

  7. John Miller

    £1.2 billion of sales gives us ~ £240 million output tax, and then deduct input taxes.

    Ie, it looks like quite a few months of VAT that was outstanding. But then companies do sometimes delay payments (and take the penalties), and all the more likely if they are struggling with cashflow…

  8. Of course, Murphy’s solution to this would be simple: companies should pay all their receipts into an HMRC account, from which VAT and Corporation Tax would be deducted before the company gets the money.

    They would then make a tax return showing their outgoings and HMRC would pay out a tax refund. Of course, the refund would be quarterly in arrears for VAT and annual in arrears for Corporation Tax.

    The fact that this would wreck the cashflow of every business in the UK and drive half of them into bankruptcy wouldn’t worry Mr. Murphy, of course.

  9. Isn’t corporation tax payable on profits? If Phones4U made a loss of £167m, there should have been a tax refund of £33m, not a payment of £9m – so the tax gap was actually less than half the amount stated.

  10. John77, the corporation tax will be on the previous year’s (years’?) profits.

    If they ever get round to completing and submitting their tax return for the final year, there will be a loss that will wipe out all their unpaid tax liability. But until they do so, HMRC will have a large amount of unpaid tax on their books.

    But will they bother to do the tax return? They’re bust, they’re not going to pay the tax or penalties anyway.

    This is another example of fictitious tax gap.

  11. A lot of Phones 4U’s business was selling contract mobile phones to punters. Customer asks for a new phone. Customer might pay something up-front to the customer, and maybe (usually) not. Network then pays a “commission” to Phones 4U for providing the customer. Out of that commission, Phones 4U then buys a handset for the customer. This might be from the network, might be from the manufacturer, or might be from a third party distributor of phones or some other source. Phones 4U then keeps spends some of the remainder of the commission on market costs, which might include kick-backs of various kinds to the customer. (Hence all the “cashback” offers that existed in the mobile phone business). The customer is then left with a contract requiring him to make monthly payments to the network. If the customer is a particularly good one, the network in the past might have shared some of that revenue with the retailer that sold the network the customer. (This is largely gone). If the customer is a particularly bad one who goes to default on payments, the network might claw back some of the commission they paid to the retailer.

    (The above is a simplification. In the worst cases there were even more middle men and third parties doing business with one another and indeed their own subsidiaries in an assortment of strange ways)

    In all this, what exactly counts as revenue for Phones 4U, what is liable to VAT etc etc? These complication of these sorts of business arrangements has made them quite prone to deceptive practices and outright fraud, and this is probably making this bankruptcy something of a challenge for the liquidators.

    Of course, not wanting to pay for all these middle men was why Vodafone (and EE, and O2) all stopped doing business with Phones 4U and sent it bust in the first place. If they did so in such a way that tax and other liabilities ended up with phones 4U rather than with them, that’s not greatly surprising.

  12. @ Richard
    PwC has a duty to reclaim this from HMRC in order to repay as much as possible to the creditors. Liquidators do actually go round collecting debts from debtors in order to pay creditors. So what has happened is that the newspaper has selectively reported just the amount claimed by HMRC and suppressed the amount that HMRC owe.

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