Small Bank plc

It is quarterly VAT time and once again my main customers have not paid on time and so I am left to pay the VAT on their invoices even though they have not paid it to me. As it did last quarter, it got me pondering why I should act as the Government's bank.

My company is in Business to Business Services and as such I do not sell direct to any consumer and therefore I am one of those VAT 'clearing houses' which helps the Government wash its taxes around the system. For every invoice I send out to UK customers, I charge VAT, then I pay the VAT on that invoice to HMRC even if it has not been paid to me. Meanwhile at the customer end they just sit tight until I scream blue murder and then pay the bill when I haven't got any scream left in me and I have gone blue in the face. HMRC is very happy as it got its VAT upon which it can earn some interest, most likely in some Icelandic Bank that pays a quarter of a quarter of naff all interest more than UK banks. Well maybe HMRC don't do that but Local Authorities did.

In a nice quirk of accounting, VAT is one of those taxes that I just pay out regardless of whether I have received the money, or for that matter, whether I can afford it. HMRC are not sentimental when it comes to VAT - they are No. 1 creditor in the line and they will get what's owed first.

This seemingly stupid state of affairs which penalises small companies which are beholden to larger companies to pay their bills on time means that I effectively become a clearing bank for HMRC and I get to pay all the interest if I cannot afford it. Such are the machinations of clever people in Government, that they think by reducing VAT to 15% it has helped businesses like mine. They could not be further from the truth - my issue is having to pay it before I am paid by my customers regardless of how much it is.

Well, we small businesses don't mind it really as HMRC are a forgiving lot and if the shoe was on the other foot, I am sure they would be very fair. If you believe that then you can believe that pigs can catch swine flu.

Scams

The interesting side effects of VAT and its methods of collection are that it is ideally suited to scams. It doesn't take a genius to work out how it can be easily set up. Company A buys a ton of goods, supposedly, from a dummy company in China or the EU. Then Company A sells the goods to Company B in the UK and charges VAT on them. Company B, sells the goods on to another offshore company and charges no VAT. Company A then simply does not pay VAT to the HMRC, while Company B claims the VAT it has been charged by Company A back from the HMRC. Because the HMRC couldn't give a monkey's whether Company B paid Company A, the scheme works nicely. Company B has some cash, while Company A simply shuts down and then forms a new Company A in order to repeat the process. The process is repeated time and again. This scam is called a VAT Carousel and it is easily the most popular scam of them all.

In many cases, no goods ever get moved, while in some, at least to avoid too many prying eyes, there may be a piece of stock such as electronic goods which nominally moves around to keep everyone happy.

Making Scams Work

The reason why such a scam works is simply the way in which VAT is collected. HMRC cannot give a flying whatever if a company does not pay my bills - it just wants the VAT I have invoiced in its coffers at the end of every quarter regardless of my business health. It is this simple notion that is exploited by scammers as if the VAT has to be collected before being paid to HMRC then it would make these scams unattractive. That would have a little more of a trail to it while offshore set-up companies and fictional employees are the usual go betweens which make this all very interesting.

A Fairer, More Secure System

It would be far more sensible to wait until money is received before forcing companies to pay the VAT on invoices. Not only would be it fairer on companies like mine but it would start to narrow the lucrative options for scammers. It's not that they would not find a way, as the criminal mind is a creative one, but at least it would stop something so obvious happening that a 3 year old could think it up and make it work.

How much is the HMRC losing on VAT scams? Between £1.1 billion and £1.9 billion or probably a good deal more than it would cost to allow all the retired Gurkhas to live in Britain if they wished.

A sense of perspective is always nice on a Bank Holiday Weekend.