Tony McClenaghan - The empire strikes back

VAT avoidance has become a very topical issue, but what is it?

in Gordon Brown’s budget next week will place accountants in a position of double jeopardy. Customs & Excise says avoidance is deliberately designed to flout the intention of Parliament, as expressed in the legislation which it passed.

Yet it has generally been accepted that taxpayers are taxed, or relieved, according to the letter of the law. A new approach appears to be emerging: although a transaction may be within the letter of the law if, in the view of Customs, it falls outside the intention of Parliament, as understood by Customs, it constitutes avoidance and is wrong.

Yet, on a regular basis, as advisers we encounter Customs officers who attempt to assess VAT in situations which, in our view, Parliament never intended to be taxed. Will this new approach cut both ways?

There are various reasons why VAT has become an important issue for many businesses. One of the most important has been the attitude of Customs itself.

During the late 1980s and early 1990s, Customs gave the impression of being either unable, or unwilling, to tackle VAT avoidance. It isn’t surprising that, as a result, avoidance schemes proliferated. But things are different nowadays. Customs’ approach has changed radically and it is aggressively attacking avoidance.

In the last two Budgets, the government gave prominence to VAT anti-avoidance measures on the advice of Customs. Increased litigation is another weapon being used. Customs is clearly more prepared now to challenge avoidance through the tribunals and courts. This is both to test the legislation and also to create uncertainty, working perhaps on the principle that the Treasury has far deeper pockets than taxpayers.

The resources dedicated to anti-avoidance activity have increased significantly under the Spend-to-Save initiative. Customs now has a central tax avoidance branch, together with local tax avoidance co-ordinating officers throughout the UK. It has also recruited accountants from the private sector to help in its anti-avoidance campaign.

Given this battery of weapons and the resources at its disposal, one might be forgiven for thinking that Customs is well on its way to getting VAT avoidance under control, and that a general anti-avoidance provision would be unnecessary. But that isn’t the case. A general VAT anti-avoidance provision seems inevitable – probably introduced in 1999 – and Customs will publish draft clauses for consultation this summer.

This move will take Customs, advisors and businesses into uncharted and uncertain waters. It raises the frightening prospect that, unless a business structures its transactions to pay the maximum possible amount of VAT, it will fall foul of the proposed general anti-avoidance provision.

A case of damned if you do, damned if you don’t.

Tony McClenaghan is a VAT partner at Deloitte & Touche.