Taxman eyes £300m in VAT from high street

Retailers who set up Debenhams-style tax avoidance schemes could end up
paying more in tax as a result of implementing the scheme, than if they had
never bothered.

Users of the schemes, which allowed 70 or so high street retailers to save up
to £300m in VAT, are likely to face investigation over a separate area of VAT,
leading to a tax bill of a similar size to the one they tried to avoid.

HM Revenue & Customs is understood to have compiled a paper on the issue,
hoping to pursue offenders in an attempt to demonstrate tax avoidance schemes
may invite not just legal challenge, but punitive extra charges.

The move is the latest strike in an ongoing and increasingly hostile battle
between the taxman and corporate taxpayers and their advisers.

HMRC’s challenge has arisen because card handling companies, set up as
subsidiaries of the retailers, are provided with services such as premises and
card processing machines by their parent company.

VAT is payable on payments for provision of such services, and tax officials
are understood to believe that the retailers have priced the arrangement cheaply
to lessen the blow.

The original schemes worked by introducing a card handling subsidiary that
took a small percentage of any payment by customers. The schemes were challenged
by HMRC, and the Court of Appeal ruled in its favour, saying Debenhams, the test
claimant, should pay VAT on the full value of the goods sold.

There is no suggestion that Debenhams, which may yet appeal to the House of
Lords, has priced its subsidiary costs too low.

The suggestion that HMRC might hit users of such schemes with extra charges
will raise the stakes for the test case. One indirect tax adviser said the move
by HMRC could be ‘extremely painful’ for retailers, potentially doubling the VAT
liability, depending on each case. Lawyers predicted the move would result in
further litigation.

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