In its recent attempts to stamp out fraud in the mobile phone/CPU trading sector HM Revenue & Customs (HMRC) has recently withheld VAT repayments to undertake extended verification of certain deals. Traders can fight back by claiming for profits they would have accrued during this delay writes Greg Lacey.
People in the industry are growing increasingly suspicious that HMRC might simply be seeking to delay the repayment of VAT for as long as possible so less VAT will be lost to fraud this fiscal year. Put another way stop trading for six months and HMRC will be able to report to parliament that they have saved half of the estimated ? 1.9 billion this year.
Whilst good intentions lay behind the approach HMRCs actions have also penalised legitimate traders in the mobile communications industry.
VAT repayments are essential to many companies in this sector who rely on regular repayments to fund ongoing business. With seemingly no end in sight many companies may have to cease trading permanently and administration/insolvency is now a very real concern. But what can they do?
Rather than sit and wait for the inevitable some traders are actively seeking to get their VAT repaid. Using the Freedom of Information Act some have sought to expose information that will embarrass HMRC into making concessions.
Another route is to apply for a Judicial Review of HMRCs actions. This approach enables traders to seek to claim the lost profits which they might have made had HMRC not withheld VAT.
The first step will be to examine the companys working capital (or funding) to demonstrate that it was the withholding of VAT that prevented further trading. As most traders use all available cash to fund the VAT paid up-front to suppliers this should not be too difficult to demonstrate.
The next step is to assess the losses suffered by traders. This works by comparing how the company would have traded had it continued to receive regular VAT repayments with its current position of having had VAT withheld.
Typically companies that have not traded for four or five months because VAT was withheld can also claim for a loss of profits. This loss can be assessed on the basis of past trading. In addition traders may also be able to claim additional costs such as professional fees involved in dealing with the problem.
However by far and away the largest element of claims is likely to be the future losses a company will suffer should it be forced to cease trading or even to exit the sector. Future losses reflect the profits that the company would have generated in the foreseeable future including profits which a dependent subsidiary company may have expected to earn.
In our experience such claims can far exceed the value of profits lost to date. If a company ceases trading or exits the sector the consequential loss of profits could be ten times the annual profits generated.
With so many companies affected by HMRCs recent actions it is easy to see that if these claims are successful the Treasury will have to find the funding to meet these payments which across the sector as a whole could reach billions.
If traders bring successful claims against HMRC the Treasury could end up paying out compensation to legitimate traders on the same scale as the VAT that HMRC was aiming to save. The short term gain might become a long term loss for the Treasury.
With that in mind serving notice on HMRC of an assessment of the potential losses that will be suffered if a company ceases trading should provide some motivation to speed up the release of the withheld VAT. At the very least it might just move your companys file to the front of the queue.
Greg Lacy is a director at accounting support specialist FAR Consulting.
