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TaxationWeb by VAT Solutions (UK) Limited

VAT Solutions (UK) Ltd explain how the Money Laundering laws and powers of HM Customs and Excise can affect legitimate businesses, including relatively small cash businesses.The new Proceeds of Crime Act has brought in tough new laws on money laundering. Most people think it only effects drugs dealers, terrorists and major fraudsters, however, relatively small cash businesses can fall foul of the laws with little recourse.

I have worked on a number of such cases recently and the following example draws on this experience.

EXAMPLE

Mr X is a businessman in his early sixties running a designer sports wear retail business turning over about £1m a year. About 70% of his takings are in cash and he prefers to deal in cash rather than trust the banks. He, therefore, only banks enough to cover is standing orders etc and makes most of his purchases using cash. He has found that by going to France he can buy designer clothing from retail outlets (even with 19.6% TVA) for less than wholesale prices in the UK, he can also get ranges that are not sold in the UK. He has been flying over to France with between £10-30,000 in cash and airfreighting his purchases back to the UK.

In August he was stopped by officers of HM Customs & Excise and explained that the money came from his business and he was on a buying trip to France. The Customs officers seized the money as he had no “proof” of where it came from. Being short of stock he tried to fly out again a couple of weeks later and the same thing happened, he was now £60k out of pocket.

He took professional advice and a cash reconciliation was carried out that showed the business had easily generated enough spare cash to account for what he was carrying. Now desperate for stock his adviser faxed the Customs officer dealing with the case the details of his next flight and how much cash he would be taking with him. Mr X took his brother-in-law, a solicitor, along to the airport and found a Customs officer to declare the money to. “Ah”, said our friendly Customs officer, “we have been expecting you” and promptly seized the cash. Mr X was arrested and taken in handcuffs to the nearest Customs custody suit were he held overnight before being released without charge.

The Customs officers dealing with the case continue to maintain that only a crook would carry a large amount of cash with him, and anyway, why not use a bank like everybody else.

Large Cash Sums

To help Customs officers combat money laundering they have trained sniffer dogs to sniff out cash! They are, apparently, operating at major railway stations and on the London underground. If the dogs sniff out some money the person carrying it is pulled in and asked to explain why he is carrying so much cash around with him.

If you regularly move large sums of cash around in the UK don’t be surprised if you are pulled over and asked to explain why you are carrying large sums of cash. You should carry proof of identity and be able to give an explanation of why you are carrying cash to prevent the inconvenience of a trip to the police station.

While we all agree that drugs dealers and terrorist should be dealt with appropriately I cannot help feeling that the authorities are abusing their powers in this area and using them as an excuse to check out if small cash businesses are declaring all of their takings. I was under the impression that the VAT control visit was the correct method of dealing with the matter.

What can be learnt from this is that if you are going to carry large amounts of cash (more than £10,000) out of the country that have been generated from your cash business the only chance of being unmolested by HM Customs & Excise is to notify them in advance, declare the money at the point of exit and carry a copy of your accounts or a recent cash reconciliation or management accounts to prove that the money has been legitimately generated by your business. In addition I would recommend that you carry copies of your bank statements if the money has been withdrawn from a bank and a copy of your VAT registration certificate. If you don’t Customs will surly seize your money and then you will have a long fight on your hands to get it back!

In addition to the Proceeds of Crime Act HM Customs & Excise have recently announced that they have got new money laundering powers “to help protect society and to combat money laundering and the criminal activity which underlies it, including terrorism”.

Dealing in High Value Goods

The new rules require any business that deals in goods and accepts payment in cash, equivalent to 15,000 euro (£10,000), to register with HM Customs & Excise. The new regulations were introduced in the budget and became law in mid summer 2003. Affected businesses will have three months to put in place new anti-money laundering systems and four months to register with HM Customs & Excise. If a business fails to meet these requirements it could face a criminal prosecution or a penalty of up to £5,000.

Although these new rules place another, quite onerous, administrative burden on businesses they may not be as troublesome as they appear at first glance.

The rules only apply to businesses that deal in goods and so will not affect any service providers. The need for registration with HM Customs & Excise can be removed if a business amends its terms and conditions so that it only accepts payments of over £10,000 by cheque, credit card, HP etc.

In reality there are not many businesses that accept cash payments of over £10,000, although the motor trade may well be most affected.

These new rules may seem difficult for HM Customs & Excise to monitor and enforce but they will almost certainly do so through the VAT system. It is quite likely that the VAT inspector will ask about methods of payment during VAT inspections so don’t be surprised if these questions start cropping up in the future.

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc