Watch out – HMRC’s about

Are you one of 40,000 businesses with a turnover of £73,000 or more per annum not VAT registered, ask Vaughn Chown and John Hood? If you are, you can expect to receive a letter from HM Revenue & Customs shortly…

And they warn, you ignore the letter at your peril because from 30 September 2011 any unregistered business that should be paying VAT can expect to receive a visit from HMRC together with a detailed and intrusive investigation of their affairs.

In the more serious cases, HMRC may instigate a criminal investigation with the business owner(s) potentially facing a custodial sentence as well as having to pay the VAT, interest and penalties due, none of which is recoverable from customers.

The VAT Initiative follows an HM Treasury announcement in October 2010 that there will be a fivefold increase in criminal prosecutions for tax evasion. The government expects to receive £100.3bn from VAT in 2011/12, up 16% from the 2010/11 take of £86.1bn.

Should I register?
VAT registration is required when taxable turnover for the past 12 months on a rolling basis exceeds £73,000 or there are reasonable grounds for believing your turnover for the next 30 days will exceed £73,000.

In the former instance, notification must be within 30 days of the end of the relevant month. In the latter, notification must be within 30 days of the date on which grounds first existed.

Should I settle now?
HMRC is encouraging people to settle any unpaid VAT for the past; it also wants to ensure that going forward, businesses continue to be compliant, file their returns and pay any VAT due on time.

But there are also a number of benefits to be gained from registering for the VAT initiative.

The maximum penalty payable if HMRC investigates a business can be up to 100% of the VAT due. However, under the initiative the penalty is only 10% of the VAT due. With good advice, in some cases, there may be no penalty to pay.

However, to ensure that businesses can utilise the benefits of the initiative a company needs to:

• Notify HMRC they wish to participate by 30 September 2011;

• Register for VAT and keep their tax affairs up to date;

• Disclose the unpaid VAT and any other taxes by 31 December 2011; and

• Pay the overall amount owed.

What next?
An application to register under the initiative should be made by 30 September. It is strongly advised that people discuss the issues with their professional advisor. This will help in minimising the business’ exposure to penalties, and will often reduce the liabilities and ensure the taxes disclosed are correct in the more complex cases.

The disclosure needs to be correct because if a business “gets it wrong” it will face further enquiries from HMRC and may be charged a higher penalty on any additional tax liabilities.

The cost of appointing a professional advisor to deal with the VAT Initiative will, in most cases, be a fraction of the cost of dealing with a full investigation that may run for at least 18 months and be very disruptive.

Businesses that make a disclosure will effectively be entering into a contract with HMRC to pay an overall amount in return for HMRC not taking any further action. Getting it right first time is of paramount importance.

But once registered for VAT, a business may benefit from various schemes that are available to VAT registered businesses which can both reduce and mitigate the VAT to pay.

Cash accounting scheme
Cash accounting enables a business to account for VAT on the basis of payments received and made instead of on tax invoices issued and received and it’s a boon to cashflow. The scheme is available to businesses with an expected taxable turnover under £1,350,000 excluding VAT.

There is a 25% tolerance built into the scheme which means that once on cash accounting, it can be used until the annual value of taxable supplies reaches £1,600,000 excluding VAT.

Flat rate scheme
The flat rate scheme simplifies the way small businesses calculate their VAT. It is available to businesses who expect their VAT exclusive turnover in the next 12 months to be no more than £150,000 excluding VAT.

Once on the scheme businesses can stay until their turnover reaches £230,000 including VAT.

The flat rate scheme removes the need to calculate and record output and input tax of every item sold or bought when working out the net VAT due to HMRC. Instead, the VAT is calculated by applying the flat rate percentage for your business sector to the tax inclusive turnover for the period.

It’s a huge timesaver and in some cases, can lower VAT payments where the business is effectively on the right side of the averages for the sector.

The flat rate to be used depends on which trade sector most accurately reflects the business. The percentages can be seen at hmrc.gov.uk/vat/start/schemes/flat-rate.htm

If a business includes supplies in two or more sectors, the percentage to be used is that appropriate to the main business activity as measured by expected turnover in the year ahead. If the business makes supplies to other VAT registered businesses, VAT invoices must be issued charging VAT at the normal rate for the supply, not the flat rate percentage.

Annual accounting scheme
The annual accounting scheme enables businesses to submit one VAT Return per year whilst making payments on account throughout the year. The scheme is normally available to businesses who do not expect their taxable turnover to exceed £1,350,000 excluding VAT in the next 12 months, excluding the sale of capital assets.

A business can apply to use the scheme together with the flat rate scheme.

Retail schemes
Special schemes of accounting for VAT are available to retailers. These schemes generally allow VAT to be claimed on purchase invoices attributable to making taxable supplies while only accounting for VAT on sales on the basis of cash received.

Credit for input tax
Being VAT registered may lower your overall costs as VAT on purchases - your input tax - can be recovered.

However, the VAT on private expenditure, business entertainment (unless entertaining overseas people), motor cars (unless used wholly and exclusively for business purposes, like a taxi or pool car), certain fixtures in buildings not ordinarily installed by builders, and goods purchased under a second hand goods scheme cannot be claimed.

Also, recovery of input tax may be restricted if the business makes both taxable and exempt supplies.

VAT returns
VAT returns are usually completed every quarter, and submitted on line with any payment due to HMRC no later than 30 days from the end of the quarter. There is an extension of seven days where payment is made electronically and businesses with regular repayments of VAT should opt for monthly returns.

Bad Debt Relief
Where a supply has been made but remains unpaid, the VAT charged and accounted for can be reclaimed where all or part of the payment not received has been written off as a bad debt.

The only requirement is that at least six months must have elapsed since the later of the date of supply or the due date for payment. A claim is made by including the amount of the refund in the VAT return for the period in which the debt becomes more than six months overdue.

Once a business reaches a given size, being registered for VAT is not an option; it’s a legal requirement. Of course businesses under the VAT threshold may choose to voluntarily register – being within the scheme does have advantages.

Vaughn Chown is a partner and John Hood is a director with Gabelle, providing expert tax support