Possible way to reduce how much VAT you pay?

Posted by danblog on March 20, 2010 in Ponderings |

I recently has a interesting pondering as to if it might (theoretically) be possible to reduce the amount of VAT that you as a person pays for the normal every day goods and services we all use.

Now I will get my mini disclaimer out the way… I have not acted out nor intend to act out anything which is mentioned in this post, nor do I encourage or endorse anyone who chooses to do so after reading this.

Bottom line, I am just thinking out loud, don’t sue me if you try it and its illegal.

Anyway, as I was saying… 17.5% of pretty much everything we all buy as UK residents is VAT (Value Added Tax), however it is my understanding that companies which are VAT registered have the ability to claim back VAT on all their purchases and of course are required to charge VAT on the goods they sell.

Now as I mention I have done pretty much no research into this idea and have no clue about its legalities.

But I wonder… Could you (in theory) register a Ltd company, for example “The Company of Dan Ltd” register it voluntarily for VAT (as you don’t have to register unless your revenues are > 68K/month, but you can do it off your own back) and then instead of Dan buying all his goods and services “The Company of Dan Ltd” buys and pays for these items by means of a directors loan from… you guessed it Dan.

So now we have a company which has brought a load of stuff and borrowed money off its only director to do so, now because this company is VAT registered it can (in theory) claim back the 17.5% VAT on all the taxable goods, “The Company of Dan Ltd” can then donate/give the items it purchased to Dan.

Now, there would be other costs to consider, for example say £20 to register the Ltd company and around £500/yr to have an accountant balance the books (required).

So now if you spend more than £2971.43  [ ((£500 + £20) / 17.5) * 100 ] on taxable goods everything after that you save 17.5% and if we assume that at the end of the year the tax man goes, ok fine we owe you… £xxxx in your VAT claims the company now has £xxxx money, which of course can be put straight into your back pocket by means of “The Company of Dan Ltd” paying off some of its (probably reasonably large) directors loan from Dan.

Now the company serves no business point obviously and if this is/was legal would purely be a tax dodge, and you would eventually end up with Dan being director of “The Company of Dan Ltd” which owes Dan many 10000’s in directors loans… which Dan being the generous feller he is… can write off… leaving Dan with a company with no debts and saving 17.5% of most of the things he buys…

Now as I said in the begging I am not and won’t be trying this, but I am still interested to know if its *LEGALLY* possible or if there is some rule or legislation which would prevent it from being allowed… as always, comments are welcome.. particularly if your a business lawyer who (doesn’t want to sue me) and can provide an answer if to this is (theoretically) possible.

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