Crushed by weight of VAT: Customs stands accused of rough treatment, writes Bruce Whitehead

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The Independent Online
BUSINESSMEN reserve a special place for the VAT man in their pantheon of anti-heroes.

While they are unlikely to be upset by Britain's concession in letting Brussels set the minimum rate of domestic value- added tax, there is growing criticism of the approach to penalties by Her Majesty's Customs and Excise.

Even the tax faculty of the Institute of Chartered Accountants in England and Wales has called on Customs to introduce a statutory power of mitigation to the VAT penalty regime. And the Chartered Institute of Management Accountants says a hierarchy of offences must be established.

Meanwhile, some practitioners believe the Treasury may be losing revenue as a result of an unfair approach to assessing VAT.

David Bertram, a retired Customs and Excise officer and now a VAT consultant, says methods for estimating misdeclarations by Asian restaurateurs are particularly inept and inaccurate.

Mr Bertram gives this example: VAT officers will have a 'test meal' and return later to check that the details are on the firm's books. Alternatively, the number of people entering the premises is used to estimate turnover and likely revenue. A three-day checking period can sometimes be calculated pro-rata over three years, and the maximum is six years, leading to massive assessments.

Statisticians have ridiculed these methods as inherently unreliable, Mr Bertram says. What happens, for instance, if visitors are not customers; or if the waiter pockets the payment for the test meal and destroys the ticket?

More worrying, observers say, is that the tribunal system, reformed by the 1986 Finance Act under the recommendations of the Keith Committee, seems to have become biased against small businesses. Before the Act, disputes were dealt with by tribunals under the same legal structure as the criminal courts: VAT assessments by Customs and Excise had to be proved beyond all reasonable doubt, and appellants were innocent until proved guilty.

Now cases only have to be proved on the balance of probability, and the tribunals require that the amount of any disputed assessment be lodged with the court before appeal - effectively making the appellant guilty until proved innocent.

Customs and Excise also exchanges information with the Inland Revenue, which can raise an additional tax demand and further weaken the appellant's situation.

Mr Bertram describes the case of an Edinburgh fish-and- chip shop forced into insolvency by the vigorous attentions Customs. The collector decided the owner had suppressed sales and under-declared VAT returns by pounds 20,600. To contest that figure, the owner had to post that amount with the tribunal court beforehand. He was unable to find the money, the business collapsed, and Customs received nothing.

Mr Bertram says he currently has three clients whose restaurants face collapse due to large VAT assessments.

'The Inland Revenue will often allow a period for income tax repayment, whereas Customs and Excise seems over-keen to go to court for a decree declaring the business bankrupt, so they can collect the VAT,' Mr Bertram says.

John Dee, the assistant collector for Customs in Edinburgh, insists, however, that VAT assessments must be collected quickly, because the business has had use of the VAT collected from customers.

Mr Bertram feels that an outside body, perhaps advised by the ethics committee of the Institute of Indirect Taxation, could regulate the system more effectively.