Legal aid to challenge Customs

THOUSANDS of cash-strapped businesses will now qualify for legal aid to defend themselves against investigation by Customs & Excise and other state agencies, if they can prove they cannot afford the legal and accountancy bills.

The way is now open to recoup the costs incurred following probes by Inland Revenue or the Contributions Agency. Every year, one in four businesses in Britain is turned over by at least one of these three. Accountancy bills can be recouped if they are incurred through a firm's lawyers.

A dispute over value added tax, Han and Yau v Commissioners of Customs & Excise, has reached the Court of Appeal, which has now ruled that an investigation into alleged evasion of VAT should be treated as a criminal, rather than civil, inquiry. Under the European Convention on Human Rights, the company under inquiry is therefore automatically entitled to legal aid, not at the point where there is a court summons, but when Customs & Excise - or the other two agencies - say they plan to pay a call.

'Companies have to pay thousands of pounds for legal assistance to defend themselves against Customs & Excise investigations,' said Simon Cohen, managing partner of solicitors Rowe Cohen. 'Now, many small-to-medium businesses can make a case for legal aid, if they can show they cannot afford the legal costs of a VAT or other investigation.'

It need not cost a company anything to find how much legal aid it qualifies for. This is the responsibility of officials to establish, once they have looked at the most recent set of trading accounts and the current management accounts.

VAT legislation is so complex that many companies no longer know where they stand and are saddled with high compliance costs, plus the prospect of expensive investigations and court wrangles.

'Even when companies win their cases, Customs & Excise often introduces further blocking tactics to prevent businesses getting back overpaid tax,' said Chas Roy-Chowdhury, head of tax at the Association of Chartered Certified Accountants.

Up to a half of small companies keep their turnover or stated turnover below the £54,000 at which VAT bites, added Professor Maurice Chittenden, ACCA Professor of Small Business Finance at Manchester Business School.