Thursday, October 27, 2011

Did Vince refuse to engage in tax 'avoidance'?

Leaving aside Vince's well publicised Tax Mistake on which I commented in my last blog post, there is another angle to the story.  Did Vince refuse to engage in what he perceived to be 'tax avoidance' even though the facility in question is set out very clearly in the rules?

I was wondering why Vince's accountant (Myrus Smith) hadn't encouraged him to register for VAT long before the problem became apparent.

They seem to be a reputable firm and I suspect they did give him the advice any decent accountant would have done. But clearly Vince did not register early.  He also seems to have ignored the standard advice that he would need to monitor his income as the year progressed, and then register for VAT once his earnings were likely to exceed the registration threshold.  This is of course harder to do in practice than in theory - despite the rules.

I suspect that his accountants gave him good advice. I suspect that they explained to Vince that he could register for VAT even when his earnings were below the VAT registration threshold. And that if he did so it would reduce his taxes.

There are two angles here. The first is that once registered Vince would simply be charging his clients VAT and then paying over this VAT to HMRC. But it would also mean that he could claim a reduction for the VAT he paid on all business related expenses. This would have saved him money.

The second angle is that he could have registered to use HMRC's official VAT flat rate scheme. This is particularly beneficial for smaller businesses with very low outgoings. I suspect Vince was in this position and could have saved hundreds of pounds a year had he registered.

But to Saint Vince, both of the above tax savings might have sounded like 'tax avoidance'. As such he probably chose not to register for VAT before it was necessary and then lost out by leaving it too late.

If I'm right this is as good an example as any that the term 'tax avoidance' is being used too widely.

What do you think?

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