Entrepreneur VAT complexities: A case study on tax disputes faced by UK-based entrepreneurs engaging in the Chinese retail market

In the ever-evolving landscape of global commerce, entrepreneurs often seek innovative ways to capitalise on opportunities, sometimes overlooking the finer details that could have significant repercussions. This case study explores the challenges faced by UK-based entrepreneurs engaging in the Chinese retail market, where the absence of the retail export scheme prompted the exploration of alternative methods for obtaining VAT-free goods.

Background

The entrepreneur, a UK resident with extensive connections in Hong Kong and China, identified a niche market for products that were both cheaper in the UK and unavailable in China. In an effort to bring these goods to the overseas community, the entrepreneur cannot go to wholesale so opted to purchase from retailers, pay VAT, and subsequently export the products to customers in China and Hong Kong. The business model assumed that VAT on purchases would be reclaimable on a VAT return and that the onward sales would be zero-rated as exports.

Challenges

However, dealing with retailers posed several challenges. Retailers were reluctant to engage with an individual buyer seeking multiple premium brand goods, as they did not want to be supplying the wholesale market. In some cases the entrepreneur therefore sought to acquire the goods by using intermediaries to buy the goods in the shops. Obtaining VAT receipts proved to be problematic, as till receipts lacked the necessary details for VAT recovery on relatively high-value items. This created a further difficulty in confirming the link between payments and purchases, leading to complications in VAT return processes.

HMRC raised concerns about the lack of proper evidence to support VAT claims, resulting in a disallowance of the VAT claimed and penalties ranging from 70-100% of the VAT. The entrepreneur, as a director of the VAT registered company, was held personally liable for the VAT penalty. The position was exacerbated when HMRC decided that the trade had actually been carried out by the director, given that he had frequently used personal credit cards instead of company cards, and decided that he therefore had a personal direct tax liability.

Lessons learned

The case underscores the importance of meticulous record-keeping and adherence to VAT regulations. Entrepreneurs, driven by their pursuit of opportunities, may overlook the critical need for a 100% audit trail, regular VAT invoices, and clear linkage between payments and purchases. Failure to establish a robust paper trail can lead to severe consequences in the event of an HMRC investigation.

How we can help

When faced with HMRC scrutiny, our services can be instrumental in navigating the complexities. We assist in understanding HMRC's position, identifying necessary evidence, and building a case with alternative proof of purchase. Additionally, we defend directors against personal liability claims by demonstrating that any errors were not deliberate.