Up front, and to be clear it has always been my intention to act within the spirit and letter of all legislation including VAT regulations. In 1996 I decided to split the company into a holding company and a trading company, for purely commercial reasons. As part of that deal the properties ended in the holding company. All was well until in 2005 the VAT man came calling.
The way I did things was to leave the holding company with the properties but not charge any rent on the properties to the trading company.. That seemed kind of fair to me. The trading company did not suffer by having to pay rent.
However, the VAT people decided otherwise. They said that we had to charge VAT on the rental of the properties. And furthermore the rental had to be at a commercial rate. Bearing in mind, by this point we had gone through multiple audits and VAT inspections with no one having a problem with the arrangement.
Now we had to raise a rental invoice charging VAT from the holding company to the trading company. The trading company would then pay the invoice and it would reclaim the VAT. The whole result of that was that the same VAT was charged and then reclaimed. There was no net gain to the government. This we had to do month in and month out forever.
However, the instruction was worse than that. They fined us for not having done that all along and demanded a large sum up front. Some of this amount we could reclaim over the next nine years. So each year, once a year we reclaimed just under £4K.
Fast forward to the VAT inspection in 2011 The VAT person now concluded that the previous agreement for reclaiming the VAT over the years didn’t exist and therefore the reclaim we were calculating was wrong. HMRC would like it back.
So we were in the position where the fine and the lump sum had been OK and forgotten but the reclaim was wrong according to the VAT people. Fortunately, our previous accountants did have a record at which point the VAT person had to back off and accept that we had complied with their original instructions.
The underlying point here is that you must do what the VAT people say even if that means charging rent when you have no wish to do so.
The VAT Man Calls Again
The next time the VAT man called with a problem was when our new company was developing barn conversions in Wolverhampton. We used subcontractors to do some of the work and some of them charged VAT at the usual rate of 20%.
No, said the VAT man that is incorrect, they must charge you 5%. The legislation says for a conversion they may charge 5% – not that they must charge 5%. Apparently, in VAT speak the word “may” can sometimes mean “must” when they wish it.
So we now had to correct the “mistake” and repay HMRC the difference between the 20% and the 5% and then reclaim it from the subcontractors. So the loop goes, we pay HMRC, and then reclaim the money from the subcontractor, the subcontractor then reclaims the money from HMRC, and HMRC are no better off.
However, the subcontractors don’t see it like that and we have a battle royal to reclaim the money from the subcontractors. Two court cases later and we are now getting the final payment in instalments back from the final subcontractor to pay up.
It’s an Alice In Wonderland world in which this kind of madness seems usual. Not only do we do all the tax collectors’ work and calculations – they can change their minds about how to interpret things at will!