Once upon a time, children’s behavior was kept in check by Cautionary Tales. Something was prohibited, someone (traditionally a naughty kid) did what they were forbidden to do, and someone (the same kid) came to a sticky end. Young bedtime readers’ inclination to err was doused by bed wetting and anguished screams in the night. The good old days.

A recent Israeli court case could have been presented as a Cautionary Tale of bygone days. The prohibition was to mess with VAT reporting; the naughty kids were those beacons of tax probity – a couple of ageing taxi drivers; and the end result was their metaphorical drowning in a vat of misery.

We have all been stung by taxi drivers at some point in our lives, most likely when we have met the definition of ‘foreigner’ at whichever airport or hotel we found ourselves hailing one. When I read the 56 page ruling, I admit there was a glimmer of schadenfreude. These blokes had been hoisted with their own petard.

This was not a case of intentional VAT fraud (like ‘forgetting’ to put on the meter when some sucker climbs into the cab). The appellant cabbies, fighting the VAT authorities’ astronomic assessment, were two partners in a taxi rank, theirs’ being the only names showing on the joint VAT registration. They charged a commission to the drivers in the rank on their fares. So far so good. The problem was that there was a number of large and recurring clients who insisted on settling their accounts periodically by single credit card payment. The appellants duly issued invoices with the addition of VAT to the clients, and were then faced with the task of dealing out the proceeds, less their commission, to the individual drivers. They had full records of who did what, and what should have happened next was that individual drivers issue VAT invoices to the appellants. In the ‘I only issue an invoice if there is a gun to my head’  taxi world in which they operated, that was evidently a bridge too far.

When the external part-time bookkeeper realized obtaining invoices from the drivers was a lost cause, he had an interesting idea. He would issue credit notes to the drivers, and claim the VAT, the end result being that the appellants only paid over to the VAT authorities the tax due on the rank commission. The idea may have been interesting, but it was unforgivably wrong: credit notes are issued by VAT dealers whose earlier invoice is incorrect, not by any Tom, Dick and Harry who can’t be bothered getting the paperwork in order. The only way not to be lumbered with paying over the VAT on the entire invoice was to receive VAT invoices from the drivers. Not only did the appellants not regularly receive the invoices, they passed the VAT element of the charge to the drivers to deal with as they saw fit. Another interesting, but utterly misguided, idea.

The judge, who was by no means a Hanging Judge, actually had mercy on the appellents. He instructed the VAT authorities to be liberal in recognizing limited evidence that a taxi driver had reported VAT on the amounts he received,  halved the fine accompanying the cancellation of the appellants’ accounting records, and queried some of the calculations used by the VAT authorities. He was less impressed with the VAT reclaims for other expenses, which ran into colossal sums, despite the whole business being run out of a concrete hut with a telephone, a radio, a kettle, a TV and an air conditioner (I assume there was a TV and an air conditioner – there always is). None of this really helped, since the judge held the appellants liable for a bankrupting amount of VAT, and despite their pleas that the taxi rank ‘partnership’ included many more drivers (most of whom no longer worked with the rank), he decided the authorities were right to insist that liability was joint and several, and the appellants owed the tax. The judge’s mercy reminded me of English monarchs’ mercy in the Middle Ages in reducing a sentence from being hung, drawn and quartered to being beheaded. The end result is much the same.

As with many good tales of earlier centuries, there was a comic – albeit tragic – element. The appellants claimed that the entire mess was due to their veteran external bookkeeper, who had come up with the whole idea as a solution to the drivers’ refusal to issue tax invoices, and tried to shift the blame. The judge was not moved.

The Cautionary Tale? Everyone needs to remember that VAT is a far less forgiving tax than income tax. While income tax is a payment from the income THAT BELONGS TO the assessee, VAT BELONGS TO THE STATE – the VAT dealer is merely the agent through whom the transactions are handled. It is a highly technical tax that requires all the pieces of paper to be in the right place, and any error can – as is evidenced here – be expensive.

The excerpts of court interviews peppering  the judgement included the statement by one of the appellants that they would sue the bookkeeper for anything it cost them, and the bookkeeper’s timid acquiescence to his fate. As I faded off to sleep last night,  I couldn’t help picturing a group of hardened taxi drivers dragging a meek bookkeeper/accountant out of a black cab next to the  parapet of a river bridge. The meter was, inexplicably, still running.