Article by Neil Warren, published in the September 2002 issue of Tax Adviser. Neil Warren is Senior VAT Consultant at Keens Shay Keens (Chartered Accountants) in Luton. He worked for Customs & Excise for 12 years and is also a part-time tax and accounting lecturer at Barnfield College, Luton.
HM Customs and Excise has been given a tough time in recent weeks!
The High Court decision instructing it to curtail its overpowering tactics in stopping travellers returning from abroad with ‘generous’ amounts of cigarettes and alcohol has been widely acclaimed. The press reaction has been as joyful as when the England soccer team scored a rare victory last year against the Germans … as excitable as when they get Tony Blair and Gordon Brown to contradict each other on a sensitive area of government policy!
The comments have been vociferous, with one broadsheet comparing Customs officers (very unreasonably) to ‘a field force acting as though pumped up with amphetamines’. Another claimed that ‘the agency has lost its ethical compass … if ever it had one’.
For tax advisers, contact with the Customs arm of the department is very limited. The key issue, therefore, is to consider the current approach being adopted by VAT officers on routine inspections – are they acting with an aggressive and forceful attitude that could produce as much criticism as for their colleagues? Also, how should tax advisers handle these routine inspections to act in the best interests of the client … and avoid any hassle!
Customs has been around for longer than most organisations, and the majority of its current powers are based on historic traditions. Back in the 17th century, its main functions were simple – to raise enough duty to fund both the lavish lifestyles of various monarchs, and a number of costly overseas wars. As a result, powers given to Customs officers were very wide, and many of these powers still exist today.
The Customs officer (really up until the 1960s) was a highly respected member of society, enjoying prestige and status rarely seen in the job market today.
Value added tax (VAT), however, is a very different ball game. The tax was only introduced in 1973, and the decision to give the role of collecting and administering it to Customs was in itself very controversial. In reality, the decision to give the tax to Customs rather than the Inland Revenue was mainly due to the fact that Customs had big staff surpluses following an excise reorganisation in 1971.
With any human function, motivation is a key issue. VAT officers are no different.
So imagine the following scene: you are a new recruit to Customs (having passed the various entrance requirements) and are ticking your application form to specify which part of the department you wish to work in. This is where the whole issue of attitudes and motivation comes into play, and is why (in my view) tax advisers have no real need to fear VAT inspections in the same way as a Customs’ interrogation at a local port.
If you are a character that is motivated by the thought of an action-packed life in the Customs front-line (drug dealers, gold smugglers, illegal immigrants packed in the back of a lorry) then your natural tendency will be to tick the box for the Customs work option. If you favour a steadier existence (routine hours, dealing with the business community, less excitement) then your inclination will be for the VAT option.
Without doubt, one of the big pluses for Customs in the last ten to fifteen years is that they have been much more successful in allocating staff to duties in the field where they are most suited. In other words, square pegs to fit square holes. For example, if a Customs officer was promoted fifteen years ago, then a natural posting was often into VAT, where vacancies were plentiful.
I remember working with one colleague at Luton VAT office, who had spent most of his successful career working as a Customs officer at Luton airport. He was promoted in his early 50s, and had to not only master VAT at this late stage in his career, but then (because of his senior grade) was given very complicated traders to visit thereafter. He summed it up for me in own simple sentence: ‘For years, I have been opening suitcases looking for drugs, and suddenly I am looking at hundreds of pages of computer printouts trying to be an accountant!’
So my conclusion in this first part of the article is that the nature of the beast in the VAT office is totally different to the type of character that is attracted to working for Customs. By nature, VAT officers tend to be more relaxed in their approach to the job, less excitable when faced with a potential problem, and usually keen to achieve a solution by working with the trader.
Having established that VAT officers are (by and large) reasonable people to deal with, the next important thing to consider is what they are trying to achieve when they carry out inspections.
Unfortunately, this is where I do think the wheels go off the road.
In February 2002, Paul Boateng (Minister with responsibility for Customs) addressed the Commons (responding to a written question to the Chancellor) to give statistical information about the yield achieved from VAT inspections. The basic figures he gave for the fiscal year 2000/01 were as follows: 5,162 staff were employed in VAT; running costs amounted to £130m; net additional tax was £2.3 billion. Overall, for every £1 cost, £17.69 of additional revenue was found.
In a nutshell, the figures highlight the ‘raison d’être’ of every VAT officer in the UK – to find underpayments of tax to justify his or her existence.
For those with doubts about this conclusion, picture another scene: you are the Chairman of Customs & Excise (the current Chairman is Richard Broadbent – a very able man who is the first postholder with a predominantly private sector background), and it is the annual meeting with the Chancellor to negotiate next year’s spending allocation. In the current climate your case is not top priority – health, education, transport are first in the queue … Customs are quite a long way down the pecking order!
The main argument you give to support extra funding for various causes is to show the productivity achieved by your department – in other words, extra tax generated, which can be used to build a substantial number of schools and pay for a considerable number of heart operations.
As a result, this need to produce results not only puts pressure on officer managers to achieve favourable statistics, but on individual districts within offices and consequently individual inspectors! In short, the success or failure of the individual officer (and we have already identified that these characters by and large tend to be less confrontational and more willing to please than their Customs colleagues) depends on his or her ability to produce underdeclarations on VAT visits!
Examples of assessments
Benjamin Disraeli famously made reference to the three forms of dishonesty as being ‘ … lies, damned lies and statistics … ‘ Unfortunately, it is very easy to make conclusions about figures without looking at what is actually going on beneath the surface.
To illustrate what I consider to be the key weakness in the VAT visiting system at present, consider the following three examples of actual VAT visits that have taken place in my local area in the last six months:
Company A reclaimed bad debt relief of £4,250 on sales made to a customer who subsequently went into liquidation. There is no doubt that the debt will never be paid. The amount claimed as bad debt relief has been correctly calculated; the six-month period since the output tax was accounted for on the original sales invoice has long passed. Papers are held by the company confirming the insolvency of the customer.
However, Company A has forgotten about the technical point of writing to the customer advising him of the bad debt claim and instructing him to reduce the input tax claimed on his next return. The VAT officer raises an assessment for £4,250 to disallow the bad debt relief, but advises the accountant at Company A to send out the necessary letter with a current date and claim the £4,250 back on the next return! He kindly adds that if the timing is favourable, the £4,250 recovery could be achieved before the officer has time to issue his assessment!
Company B has reclaimed input tax of £2,150 on a faxed copy of a purchase invoice. The officer disallows the claim as it is not the original – he issues an assessment for £2,150. However, he then suggests to the client that he sends the copy back to the supplier, asks the supplier to certify the invoice as a true and fair copy – and then reclaim the input tax of £2,150 on the next VAT return submitted.
The accountant at Company C identified £3,150 of VAT errors (underpaid), relevant to period ended 31 July 2001. He paid the amount to Customs by making an entry in box 2 of the October 2001 return. However, the VAT officer advises that because the amount exceeds £2,000 it should have been corrected by a voluntary disclosure, allocating the tax to the July 2001 period. He advises that he will correct the situation by issuing an underdeclaration for £3,150 for the July 2001 period; an overpayment of tax for the same amount allocated to the October 2001 period. A nil assessment overall – but with a default interest charge for the three-month period between July and October.
Have you identified the common theme with the three examples above ?
In short, when it comes to Paul Boateng’s announcement to the Commons, his figure will include £9,550 of additional tax saved by the officers in the above examples. However, in reality, the true amount of additional tax saved is … nil! Even with the third example, the statistics recognise the July assessment as underpaid tax.
In footballing terms, it is like David Beckham scoring a cracking goal and celebrating in style … and forgetting to mention that the goal was disallowed 30 seconds later for offside! ‘I know it was disallowed Sir Alex, but it was a brilliant hit!’
Tax advisers response
This is where my main advice comes to tax advisers acting for clients such as those in the three cases above. In each case mentioned, the accountant at the company in question was disturbed by the action taken by the officer.
In the bad debt example, the client saw it as nothing more than a red tape exercise that was ‘typical civil service bureaucracy’.
In the second example, the client felt that as he had original paperwork for 99.9 per cent of his purchases, the officer should have accepted the odd photocopy and turned a blind eye.
In the third example, the client felt that he should have been praised by the officer for his honesty in declaring the earlier underpayment – not penalised with an assessment that produced an interest charge (albeit a small one). Two out of the three accountants wanted to formally challenge the decisions.
My interpretation of the circumstances was very different. In each case mentioned, I reached two key conclusions:
- the VAT officer was technically correct in the action taken; and
- the client should not have worried because at the end of the day there was no adverse affect on his bottom line profit – all he was being faced with was a small interest charge and a bit of extra paperwork to process.
In basic terms, everyone should have been happy with the outcome:
- the company because they are not faced with any extra tax to pay;
- the VAT inspectors because they have found underdeclarations of tax that will keep their superiors (and Mr. Boateng) happy; and
- the tax adviser – because the officer has not found any real problems that the client could claim he should have been advised about.
In short, the situations have produced the classic ‘win, win’ situation. Why is there any cause for concern?
So what are the key conclusions overall ?
- VAT officers carry out their duties in a courteous and reasonable manner.
This is supported by the recent Adjudicator’s report that confirmed that about 80 per cent of complaints received against Customs were related to Customs issues. The VAT training programme within Customs encourages officers to co-operate with the business community on VAT visits, and achieve solutions in a sensible and fair manner.
- The success or failure of a VAT officer’s job depends on his or her ability to find
underdeclared tax. This will certainly produce assessments that the client will consider unnecessary and meaningless. However, the key point is for the tax adviser to encourage the client to accept assessments if the officer is technically correct – and only raise an appeal if the calculations or principles are wrong.
- For Mr. Brown and the Treasury, I think they should encourage Customs to give a bit more detail about their very impressive VAT statistics. After all, if an underdeclaration of tax is paid back to the taxpayer on his next VAT return, it is hardly likely to help the government’s revenue position.
So come on Customs … let’s have you reporting a figure for ‘sticking tax’ … in other words, tax found by an inspector that really is extra revenue for the Exchequer. However, this figure may produce a few shocks in the Treasury corridors of power!
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September 2002 by