VAT backlog 'hits inward investment'

Britain is set to lose out on crucial inward investment because of huge backlogs in the value added tax (VAT) system, a leading accountant warned yesterday.

Blick Rothenberg said delays at the HM Customs & Revenue department responsible for issuing VAT registration numbers had led to a series of overseas companies taking their business to continental Europe rather than setting up in the United Kingdom.

The accountant also warned that the delays had hit small businesses that were registering for VAT for the first time following an increase in their turnover.

Under British tax laws, any company with an annual turnover above the VAT threshold - which is £61,000 in the 2006-7 tax year - is legally required to charge the tax on sales of its products or services. But until a company has a VAT registration number, it is unable to issue VAT invoices.

Until recently HM Revenue & Customs took just three weeks to process applications for registration numbers, but the wait has quadrupled to 12 weeks in recent months because officials at the department are desperately trying to crack down on VAT crimes such as carousel and missing-trader fraud.

In a letter to frustrated accountants sent out earlier this month, HM Revenue & Customs warned: "Although we aim to process applications in three weeks, it is currently taking about 12 weeks. This is because we are now carrying out a wide number of checks on every application."

Alan Pearce, a partner at Blick Rothenberg, said: "While I understand the need to prevent these frauds, bona fide overseas companies are attempting to set up in the UK only to discover that they will have to wait months before being able to properly invoice their customers."

In one case now being dealt with by Mr Pearce, a Canadian company has become so fed up with the time taken to process its application for a VAT number that it has now decided to use the Netherlands as its European base rather than the UK.

The VAT delays are causing some companies serious cashflow problems while they wait to bill customers. Some companies are losing out even more seriously because their lack of a VAT registration number prevents them applying for refunds of tax they would otherwise be eligible to reclaim.

In theory, companies are allowed to issue preliminary invoices to customers that warn there will be a further VAT charge later on. However, Mr Pearce added: "This gives many companies a credibility problem - many of their customers simply will not deal with organisations not properly registered for VAT."

A spokesman for HM Revenue & Customs said: "These delays are unfortunate, but people need to bear with us while we attempt to tackle fraud at source."

Figures published by the Treasury last year suggested that VAT fraud could be costing the UK as much as £1.4bn a year.