Great news! I saved £12.70 on my VAT bill but paid £95 to sort it... proof our tax rules are potty

UNTIL my semi-retirement last December, when I left the staff of the Daily Mail to set up as a self-employed freelance, I hadn’t realised quite what a nightmare small businesses have to face every three months as they negotiate Britain’s absurd tax system.

Did I say absurd? I meant deranged — and from this month, it’s all about to get worse.

For a start, it came as an unpleasant surprise to me that since my turnover was likely to exceed £85,000 (yes, I know, I’m spoiled rotten) I would have to start charging VAT to anyone who employed my services. In my case, that meant demanding an extra 20 per cent on top of the fees I’m paid by this newspaper, since I don’t write for anyone else.

Every quarter, I then have to pass on to the taxman the VAT I’ve amassed in my capacity as an unpaid tax collector.

And here’s where the madness kicks in. For no sooner have I handed over the cash to HMRC than the Mail claims it back from the Treasury as a tax-deductible business expense.

And so this ludicrous money-go-round keeps spinning, with the Government gaining nothing. Less than nothing, in fact, since it’s saddled with the expense of employing officials to oversee the farcical transfer of VAT from the Mail to me, then from me to HMRC and then back from the taxman to the Mail.

Fuss

A colleague in a similar position to mine tells me that years ago, he raised this lunacy over lunch with the then Chancellor, Gordon Brown, asking him what he proposed to do about the waste of everyone’s time and money.

According to my friend, the future Prime Minister simply couldn’t understand what the fuss was about.

In fact, the system is even less efficient than I’ve described. This is because I’m entitled to reclaim the VAT I pay on such essentials for my job as notebooks, pens, telephone calls and a small proportion of my utility bills, since I now use my house as an office about one day a week.

Well, when I first registered for VAT at the end of last year, I simply couldn’t be bothered to reclaim anything from the taxman. Not only would it have meant filling in mind-numbing forms, but I would also have had to keep a record of everything I spent on paper, printer ink, staples and suchlike.

So I just bunged the taxman every penny of the VAT I’d been paid — and he gave it all back to the Mail.

The truth is that my line of work lands me with very few business expenses. Yes, I suppose it’s possible that a clever tax lawyer could argue that every penny I spend is essential to my job, since most of my meanderings are about the joys, trials and tribulations of everyday life and the human condition. But it won’t wash: almost everything I spend, I would have spent anyway, whether a column came of it or not — petrol to visit my mother-inlaw in Oxfordshire, a top- of-the-range dog-flap for Minnie, our hyperactive puppy, birthday and Christmas presents for Mrs U and the boys . . .

The last thing I wanted was to spend my declining years in dispute with the taxman, who likes nothing better than persecuting minor chancers while he negotiates sweetheart deals with giants such as Amazon and Google.

Far better, I thought, to pay slightly more than my due – and save myself a whole lot of paperwork, once every three months — than risk the horror of an investigation by HMRC.

But my friends told me I was bonkers not to reclaim what I could. One said he’d only once been investigated by the taxman — and that was for reclaiming too little! So against my better judgment, I took his advice, started keeping my VAT receipts for stationery and the like — and hired a charming and efficient tax consultant to complete my quarterly returns for me.

Which brings me to this Wednesday, when my new accountant emailed with the sensational news that she had saved me a princely £12.70 on my VAT bill for the period from the beginning of February to the end of April.

Chaos

She enclosed the bill for her services. It came to £ 95, with the cheering message attached: ‘These fees are also tax deductible!’

Now, I’ve often confessed that I struggle with maths. But even I can see that £95 (to be fair, a thoroughly reasonable fee for an accountant) is a somewhat larger sum than the £12.70 she saved me.

And it will still be somewhat larger, even after I’ve reclaimed the tax on it. There’s no getting away from the truth that both HMRC and I would have been better off if I’d stuck to my guns, shunned any professional help and simply paid the taxman all the money I’d collected in VAT.

But my accountant had more bad news for me when I gently suggested that, grateful though I was for her help with the VAT form, I could probably manage without her in future. From this month, she said, HMRC is bringing in a whole new system, Making Tax Digital (MTD), under which I must register separately for VAT. What’s more, from now on returns will have to be filed by MTDenabled software — advertised on the internet at £10-£30 a month. Cue chaos.

‘This is entirely new so we are not sure how it is going to work. But watch this space,’ she said.

My heart sank. Oh, well, I’d better leave my VAT returns in her professional hands — though who would have thought the taxman would make it so difficult for a layman like me to overpay him?

Indeed, it strikes me that the only people who benefit are accountants. It’s no surprise, therefore, that ‘Spreadsheet Phil’ Hammond, the Chancellor who introduced MTD — and who insists on four VAT returns every year, instead of just one — is himself one of nature’s accountants.

Of course, my minor expense and inconvenience pale into insignificance beside the three-monthly ordeal faced by proper small businesses, with significant expenses, struggling to survive or expand.

Stifling

Leave aside the pernicious way in which the VAT rules so often bring growth screeching to a halt. This is because as soon as a company starts getting somewhere, with turnover crossing the £85,000 threshold, it is forced to slap an extra 20 per cent on its prices, putting it at a huge competitive disadvantage against smaller rivals.

The sheer complexity of the system and the paperwork involved eat away hours of valuable time that could more profitably be spent in developing, producing and marketing products and services.

And it’s not just VAT they have to worry about. As Home Secretary Sajid Javid highlighted on Wednesday, firms also have to contend with three other taxes: business rates, national insurance and corporation tax.

Endorsing a pamphlet from the Centre for Policy Studies, which recommends rolling all four into one consolidated tax, Sajid Javid said: ‘This report shows how bureaucracy and paperwork are stifling the growth of our small businesses, and offers a series of compelling ideas for how government can roll back the tide and show that the Conservatives are backing entrepreneurs.’

Mind you, I wish I had a tenner for every time I’ve heard a politician pledging to simplify the tax system. Nor has it escaped my notice that such promises come thicker and faster whenever there’s a leadership contest in the offing.

But as small business owners tear out their hair, four times a year, wouldn’t it be hugely refreshing if instead of just talking about it, HMRC matched action to its slogan: ‘Tax doesn’t have to be taxing’?