Thursday, October 27, 2011

Vince wins Tax mistake of the week - tho there's more to this than meets the eye

I couldn't resist bringing this blog out of hibernation to comment on the story about Vince Cable and the £500 fine he paid for failing to register for VAT. (And who can blame the Sun for reporting this under the headline 'Vince Avoids Tax').

Of course he wins my Tax Mistake of the Week award.

But I have some questions that the mainstream media seem to have missed. And in so doing they have misreported the story.

1 - Did Vince or any of his staff issue invoices for the fees and royalties that he earned during the year in question? If not how will he satisfy HMRC re the adequacy of his books and records? (I mean his accounting books and records, not the book he wrote or his Dancing records!) Let's assume the answer to this questions is 'yes'.

2 - Was VAT added to the fees he charged? If so, the invoices will have falsely suggested to his clients and publisher that he was registered for VAT and they will have accounted for VAT in error. So this probably didn't happen.

3 - But, if VAT wasn't added then his taxable income will have been overstated. Has he claimed his tax refund? For example on just one invoice he would have paid income tax on £8,000 but HMRC have now deemed this to include VAT such that his taxable income should be reduced to £6,667.

4 - How much has this error really cost Vince?
If his taxable income is now lower than he thought he will also have gifted more to charity than he intended to do so. In the above example, Vince is said to have gifted the KPMG fee of £8,000 to charity (under Gift Aid presumably).  He has sufficient other income to cover this but his 'embarrassing' error has cost him more than the fine. He's out of pocket by the excess donations to charity. And if he hasn't claimed back the additional income tax then that's a further cost too.

There is also the question of whether Vince would have been treated as generously by HMRC under the new new penalty regime. And whether he received any special treatment.
I doubt we will ever know.

Let me be clear. I sympathise with Vince's embarrassment and agree that he did absolutely the right thing in sorting things out, unprompted, as soon as the oversight was brought to his attention.  He neither sought to nor did he avoid any tax. Indeed he may well have refused to engage in what was to him tax avoidance by registering early for VAT. (See next blog post).

The above points are relevant to each invoice Vince issued for his speeches and for his book royalties. For example it has been reported that Vince charged £8,000 for a speech to KPMG. Did he invoice £8,000 or £9,600 (being £8,000 plus VAT)? If he only charged £8,000 then HMRC are deeming this to be VAT inclusive. The VAT included in such a fee would be £1,333 leaving net earnings of £6,667.

1 comment:

  1. Was this a cock up or evasion?

    As you say, if Joe Public did this HMRC would have treated it as evasion.