Letter: The use of VAT to penalise late payers

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The Independent Online
Sir: Professor New's article is unfortunately based on a fundamental misconception concerning the mechanics of VAT as laid down in the EC Sixth Directive.

Professor New, in order to coerce businesses into prompt settlement of invoices, advocates the prevention by legislation of the reclaim of the VAT charged on the invoice if settlement is not effected within 30 days.

Such a measure would be contrary to Article 17(2) of the EC Sixth VAT Directive, which determines that a business is entitled to reclaim VAT incurred on expenditure which is used for the purposes of the business's own taxable supplies.

There is no provision whatsoever for reclaim of VAT to be blocked in the manner envisaged by Professor New; the only VAT which is and may be blocked under the EC Sixth Directive

is that which is not strictly business expenditure, such as that

on luxuries, amusements or entertainment.

Notwithstanding the above, it is clearly wrong in principle to advocate the use of a tax system as a means of commercial coercion.

Yours faithfully,

JOHN N. BROWN

VAT Partner

Ernst & Young

London, EC4

9 March

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