HM Revenue & Customs is set to cross a crucial tax boundary in its
ongoing assault on tax avoidance, potentially levying VAT on zero-rated goods
for retailers who used a high-profile VAT avoidance scheme.
Accountancy Age revealed two weeks ago that the government was
setting out to punish retailers who used Debenhams-style schemes by pursuing all
the taxable relationships generated by the systems. They allowed retailers to
channel 2.5% of all purchases to a card-handling subsidiary and avoid VAT.
HMRC is now looking to challenge the exemption of the card handlers from VAT.
If successful, it would result in VAT being charged on all goods that had gone
through the card-handling scheme. That would mean paying VAT on goods currently
zero-rated, such as baby clothes, which were paid for through the handlers as
well as those standard-rated.
The challenge would be dependent on a court finding that there were two
supplies of goods, which the Court of Appeal declined to decide in July.
Chris Tailby, head of anti-avoidance at HMRC, outlined the attack in a letter
earlier this year: ‘If we do ultimately go after the handlers and the supply is
found to be standard-rated, it will result in more VAT being paid to Customs
than has been avoided under the scheme…retailers who sell food and children’s
clothes and other zero-rated items are particularly at risk.’
HMRC also plans to challenge the payments made between card-handlers and
retailers, giving rise to a further bill, the letter, seen by Accountancy Age,
makes plain. This could result in a bill for retailers as large as the £300m
Insiders said HMRC was pursuing the cases in order to demonstrate that
avoidance schemes invite not just legal challenge, but harsh penalties. Tailby
wrote in the letter: ‘Businesses and their advisers should understand that we
will deploy all the arguments available to us, across all the taxes.’
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