How to defend yourself against the VAT man

Managers who are made redundant are increasingly turning to self- employment as consultants. All too often, as Ken Welsby discovers, success in their new field can lead to problems with the VAT system.

Gerry and Joan Walker thought running a small business was hard enough. Then they were presented with a demand for pounds 10,000 after the local VAT office ruled that they had under-declared their liabilities.

Their West Country computer consultancy - launched after Gerry had been "out-placed" - was still struggling to break even at the time. Joan wrote back, asking for more details. Over the next four months the exchange of correspondence grew more heated, and the Walkers became increasingly worried.

The last straw came when the Walkers were told that unless they paid up immediately they would be taken to court. They handed the problem over to their solicitor and accountant. After a further three months of work and worry - and spending more than pounds 1,000 on professional fees - they were told the problem was all down to a wrong interpretation of the firm's books. Their liability was less than pounds 500.

The Walkers are far from being alone. Taxpayers who appeal against VAT penalties often get a standard letter saying that "from the information given, the reasons do not amount to a reasonable excuse and the penalty therefore remains intact".

At this stage, says Nigel Ferrington, VAT consultant at chartered accountants Moores Rowland, many people mistakenly give up, "either because they are frightened of upsetting their local VAT man or because they think it won't make commercial sense to fight any further."

Mr Ferrington, who deals with up to 100 cases a year of firms facing serious VAT penalties, says it is often worth doing some "digging and delving" to provide material for the defence.

Reasons which can be interpreted as "reasonable excuse" can include the illness of a partner or senior staff member, pressure of work, and even - in the case of a sole trader or small business - personal and family pressures.

"For example, if a big customer failed to pay, and this had a dramatic effect on your cash position, it would be worth arguing the case.

"If you could show that you had done your due diligence, that the customer had appeared credit-worthy, and that you had prioritised your obligations to pay VAT ahead of trade debts, that ought to count as a reasonable excuse for non-payment."