Trading outside the EU to profit from the VAT system


G

Graeme

Hi to all the regulars, especially Ronald.

I haven't been posting for a while now, still working on building
my business up i.e. www.abetterworld.co.uk.

However, (unfortunately or otherwise) last night my obsessive
brain returned to thinking about my old " VAT avoidance trading
scheme" and how (as Ronald will testify) I could not get it to
"work" previously.

After a year or two break and thinking about the problems afresh
I'm hoping that I can now do so.

Remember the illustrative trading companies i.e. Tom, Dick and
Harry and the hypothetical (before and after) yearly "accounts".

So before participation in the scheme Tom has the following set of
"accounts":

£100K sales

£20K stock costs
£10K wages

That's it i.e. no other deductions.

So £70K liable to CT correct?

The VAT liability would be calculated thusly:

£100K sales so Tom has collected £17.5K Output VAT.

The Input VAT = "£20K stock costs" so this'd be £3.5K

Thus Tom sends the VAT man a cheque for (£17.5k - £3.5k) £14k

Correct so far?

Now let's imagine the same set of accounts after Tom has
participated in my "hypothetical scheme" with me being Dick.

Dick sells Tom goods to the value of £100K.

Dick then helps Tom to sell those goods to Harry (located outside
the EU) for £100K.

No money is made on the sale of these goods so obviously neither
Tom nor Dick can benefit in this regard.

However, now when Tom calculates the Input VAT:

£20K original stock costs + £100K additional stock costs = £120K
total stock costs

Giving £21K Input VAT

The Output VAT would be exactly as before i.e:

£100K original sales collecting £17.5K Output VAT.

£100K additional sales would be exempt from VAT.

So now (after participation in the scheme) the VAT man would be
sending Tom a cheque for (£17.5K - £21K) £3500.

Correct?

So my question to Ronald and others. Does my scheme now work i.e
does Tom benefit financially from participation?
 
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R

Ronald Raygun

Graeme said:
Hi to all the regulars, especially Ronald.
Oh my goodness, I thought you were dead. What an unpleasant surprise.
However, (unfortunately or otherwise) last night my obsessive
brain returned
Plus ca change.
Remember the illustrative trading companies i.e. Tom, Dick and
Harry and the hypothetical (before and after) yearly "accounts".

So before participation in the scheme Tom has the following set of
"accounts":

£100K sales

£20K stock costs
£10K wages

That's it i.e. no other deductions.

So £70K liable to CT correct?
CT? We must be thinking not about Tom, then, but about Tom Ltd, but that's
a minor point. OK, agreed.
The VAT liability would be calculated thusly:

£100K sales so Tom has collected £17.5K Output VAT.

The Input VAT = "£20K stock costs" so this'd be £3.5K

Thus Tom sends the VAT man a cheque for (£17.5k - £3.5k) £14k

Correct so far?
OK. But note that sending this cheque does not reduce Tom's profit
from 70k to 56k. Rather, his "inc-VAT trading profit", to coin a
somewhat meaningless term, was £117500 minus £23500, or 94k. His
VAT cheque reduces this to a real trading profit of 80k. Finally
the overhead expenses of 10k further reduces this to a taxable
profit of 70k.

VAT inflows and outflows always add up to zero. His sales were 100k
plus output VAT, his purchases were 20k plus input VAT, and if output
exceeds input, the surplus goes to HM as a cheque. If input exceeds
ouptut, the deficit is refunded by HM.
Now let's imagine the same set of accounts after Tom has
participated in my "hypothetical scheme" with me being Dick.
You being Dick? No, I won't comment. No Sir, I will not. Not in
a month of Su Mhn bw wh bwha ha HAAAH Ha Ha ha, erm. Sorry.
Dick sells Tom goods to the value of £100K.

Dick then helps Tom to sell those goods to Harry (located outside
the EU) for £100K.

No money is made on the sale of these goods so obviously neither
Tom nor Dick can benefit in this regard.
Well, they usually would, but I appreciate you've set the profit
margin to zero simply to avoid introducing unnecessary complication
into the arithmetic. Bless you, possum.
However, now when Tom calculates the Input VAT:

£20K original stock costs + £100K additional stock costs = £120K
total stock costs

Giving £21K Input VAT

The Output VAT would be exactly as before i.e:

£100K original sales collecting £17.5K Output VAT.

£100K additional sales would be exempt from VAT.

So now (after participation in the scheme) the VAT man would be
sending Tom a cheque for (£17.5K - £21K) £3500.

Correct?
Yes.

So my question to Ronald and others. Does my scheme now work i.e
does Tom benefit financially from participation?
No.

As before, VAT inflows and outflows cancel out. In exactly the same
way as, in scenario 1, the cheque Tom sends HM does not reduce his profit,
the cheque he receives from HM in scenario 2 does not increase it. All
it does is refund to him the deficit he has already suffered as a result
of input VAT exceeding output VAT.

It might help you to look at things in terms of (meaningless) inc-VAT
profit. His inc-VAT sales are £117500+£100k = £217500, his inc-VAT
purchases are £23500+£117500 = £141k, so his inc-VAT trading profit
(before deduction of the £10k wages expense) is £76500. Add the HM
cheque of £3500 to bring this up to £80k, just as before.

qed
 
G

Graeme

Ronald Raygun said:
Graeme wrote:

CT? We must be thinking not about Tom, then, but about Tom Ltd,
but that's
a minor point. OK, agreed.
So in scenario 1, Tom ltd has £100K sales, the stock costs are
£20K which leaves £80K (before the £10K deduction) profit.

"Unconnected" to this Tom also has to send the VATman a £14K
cheque.

In scenario 2. Tom ltd has £200K sales, the stock costs are £120K
which again leaves £80K (before the 10K deduction) profit.

VATman sends Tom a cheque for £3.5K

How does Tom Ltd not benefit?

He has still got the £80K profit and now (after participation) the
£3.5K rebate so £83.5K (before the 10K deduction) profit.
 
G

Graeme

Graeme said:
So in scenario 1, Tom ltd has £100K sales, the stock costs are
£20K which leaves £80K (before the £10K deduction) profit.

"Unconnected" to this Tom also has to send the VATman a £14K
cheque.

In scenario 2. Tom ltd has £200K sales, the stock costs are
£120K which again leaves £80K (before the 10K deduction) profit.

VATman sends Tom a cheque for £3.5K

How does Tom Ltd not benefit?

He has still got the £80K profit and now (after participation)
the £3.5K rebate so £83.5K (before the 10K deduction) profit.
Or might it work another way?

Scenario 1

Take off the £10K deduction leaving £70K LCT

Whatever the real calculation is we'll tax this @ 23% so

£70K - £16,100 = £53,900 profit

Scenario 2

Exactly the same but now £53,900 profit + £3.5K rebate = new
profit £57,400

Best Regards

Graeme Nicholson
www.abetterworld.co.uk
 
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R

Ronald Raygun

Graeme said:
So in scenario 1, Tom ltd has £100K sales, the stock costs are
£20K which leaves £80K (before the £10K deduction) profit.

"Unconnected" to this Tom also has to send the VATman a £14K
cheque.

In scenario 2. Tom ltd has £200K sales, the stock costs are £120K
which again leaves £80K (before the 10K deduction) profit.

VATman sends Tom a cheque for £3.5K

How does Tom Ltd not benefit?
He does not benefit because the £3.5k in-cheque in scenario 2 is
equally as "unconnected" with his profit as the £14k out-cheque
is unconnected in scenario 1.
He has still got the £80K profit and now (after participation) the
£3.5K rebate so £83.5K (before the 10K deduction) profit.
No, you fool. Why can't you see this?

If in scenario 1 he did not have to send £14k to HM, his profit
would have been £94k instead of £80k.

If in scenario 2 he did not receive the £3.5k from HM, his profit
would have been £76.5k instead of £80k.

In both cases £80k is the bottom line after all[*] is said and done.

[*] all except the wages deduction, of course, and any non-VAT taxes.


Consider scenario 3. This takes in *just* the Tom Dick Harry business,
so that scenario 2 is no more nor less than doing both scenario 1 and
scenario 3 together, either concurrently or consecutively, it doesn't
matter. There is no magic in combining them. Their accounts can
simply be added together.

Scenario 3:

Tom spends £117.5k buying merchandise from Dick. Then he collects £100k
from selling it to Harry. Then he gets a cheque for £17.5 from the VAT
man, being the difference between £0 output tax and £17.5k input tax.
Result: Neutral. Neutral both in terms of the £100k goods money and in
terms of the £17.5k input VAT spent and later refunded.

The £3.5k in-cheque of SC2 is not an "additional benefit". It's just the
£17.5k in-cheque of SC3 minus the £14k out-cheque of SC1.
 

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