Category Archives: VAT Payment

VAT: New penalty regime delayed

By   17 January 2022

The new system for the way penalties and interest is charged due to be introduced on 1 April this year has been deferred to 1 January 2023.

The new points-based regime has been delayed to allow HMRC to implement the necessary IT changes.

I wonder if that represents a reasonable excuse for HMRC being late…

VAT stats 2020-21

By   20 December 2021

HMRC has published UK VAT statistics for 2020 to 2021.

Headlines

The total VAT receipts in the tax year ending March 2021 decreased by 22% (£24.1 billion) from the previous year. There was a downward impact on receipts from the VAT deferral measure which took effect from 20 March 2020.

The Wholesale and Retail sector continued to be the largest contributor to net Home VAT liabilities.

Import VAT receipts was also lower: £4.2 billion (13%) for the year compared to the year ending March 2020. This was mainly due to postponed VAT accounting.

68% of total net home VAT declared was paid by traders with an annual turnover greater than £10 million.

VAT population – income

Incorporated companies accounted for the largest share of the VAT population and annual turnover. Companies accounted for 73% of taxpayers, and 92% of annual taxable turnover in the year ending March 2021. Sole proprietors were the second largest group in terms of VAT population; this group accounted for 16% of VAT traders.

Businesses with an annual turnover greater than £10 million declared £67 billion in net VAT, 68% of the total for the tax year. This group only accounted for 1% of businesses.

52% of businesses declared annual turnover below the VAT registration threshold of £85,000.

VAT population – trade sectors

The wholesale and retail sector was the largest in terms of contribution to VAT liabilities. Net VAT liabilities were £29 billion (30%) of the total for the tax year ending March 2021. The financial and insurance sector has replaced the arts, entertainment and recreation sector and accommodation and food services sector in the top ten trade sectors from the previous year.

The construction sector increased by £650 million (12%), the largest year-on-year change. The only other sectors to see increases were wholesale and retail sectors which increased by £30 million (2%) and professional, scientific, and technical activities which increased by £19 million (2%). Of the top VAT contributing sectors, the financial and insurance sector saw the largest decrease of £560 million (25%).

VAT registrations

New registrations increased from the tax year ending March 2013 to the tax year ending March 2017 where it decreased by 33,666 (8%). Since the tax year ending March 2018, there has been an upward trend in new registrations – 300,000 in the year to 2021.

Deregistrations were below 200,000 a year from the tax year ending March 2014 to the tax year ending March 2016, but increased above that level in the tax year ending March 2017, increasing further in the tax year ending March 2018. This increase in deregistrations was likely to be linked to policy changes in relation to the Flat Rate Scheme.

The freeze in the VAT registration and deregistration thresholds has increased the number of registrations and decreased the number of deregistrations progressively from the year ending March 2019.

VAT: HMRC to end making payable orders to NETPs

By   9 November 2021

HMRC will stop issuing payable orders to overseas non-established taxpayers (NETP – taxpayers who are registered for UK VAT but do not have a business address here). The system automatically issued a payable order if a NETP was due a repayment.

Background

HMRC has received notifications and complaints from taxpayers advising that they can no longer cash their payable orders in their country or their bank. The impact of Brexit and COVID19 has seen an increase in banks/countries no longer accepting payable orders. Consequently, HMRC were sending repayments to NETPs with the knowledge they may not be able to cash them.

New Gform

To address this issue HMRC has created a Gform that will enable NETPs to send their bank account information in order that the issue of a payable order can be avoided and a Clearing House Automated Payment System (CHAPS) payment made instead.

Access

HMRC systems do not currently have CHAPS functionality or the ability to store overseas bank information. However, once a NETP has completed the form, which is accessed via the Government Gateway HMRC will set a lock on the taxpayer’s record to prevent the payable order being automatically issued. NETPs will then receive their repayments directly into their bank account without the need to visit their bank to cash a payable order.

Information required

Information requested on the Gform will include:

  • VAT registration number
  • address
  • email address
  • bank account information
  • payable order information if necessary

Latest European VAT rates

By   2 November 2021

NB: Not all countries listed are part of the European Union (EU).

Country VAT rates
Albania 20%
Andorra 4.5%
Austria 20% Reduced rates 19%, 10%, 13%
Belarus 20%
Belgium 21% Reduced rates of 12%, 6%
Bosnia & Herzegovina 17%
Bulgaria 25% Reduced rates 13%, 5%
Croatia 25% Reduced rates 13%, 5%
Cyprus 19% Reduced rates 9%, 5%
Czech Republic 21% Reduced rates 15%, 10%
Denmark 25% Reduced rate 0%
Estonia 20% Reduced rate 9%
Finland 24% Reduced rates 14%, 10%
France 20% Reduced rates 10%, 5.5%
Germany 19% Reduced rate 7%
Georgia 18%
Greece 24% Reduced rates 13%, 6%
Hungary 27% Reduced rates 18%, 5%
Iceland 24% Reduced rate 12%
Ireland 23% Reduced rates 13.5%, 9%
Italy 22% Reduced rates 10%, 5%
Latvia 21% Reduced rates 12%, 5%
Liechtenstein 7.7% Reduced rate 2.5%
Lithuania 21% Reduced rates 9%, 5%
Luxembourg 17% Reduced rates 14%, 8%
North Macedonia 18%
Malta 18% Reduced rates 7%, 5%
Monaco 20% Reduced rates 10%, 5.5%, 2.1%
Montenegro 21%
Netherlands 21% Reduced rates 9%
Norway 25% Reduced rates 12%, 6%
Poland 23% Reduced rates of 8%, 5%
Portugal 23% Reduced rates 13%, 6%
Romania 19% Reduced rates of 9%, 5%
Russia 20%
Serbia 20% Reduced rate 10%
Slovakia 20% Reduced rate 10%
Slovenia 22% Reduced rates 9.5%, 5%
Spain 21% Reduced rates 10%
Sweden 25% Reduced rates 12%, 6%
Switzerland 7.7% Reduced rates 3.7%, 2.5%
Ukraine 20%
United Kingdom 20% Reduced rates 12.5%, 5% 0%

VAT: HMRC OSS updates

By   5 October 2021

HMRC has issued two new documents which provide practical guidance for users of the One Stop Shop (OSS).

They cover how to pay the VAT due on an OSS return and how to use the service to submit an OSS VAT return if a business is registered for the OSS Union Scheme. A link has been added to allow a business to submit a OSS return directly.

VAT: The tax gap was £35bn in 2019/20

By   17 September 2021

HMRC has published details of the tax gap for 2019/20. This is the gap between the expected tax that should be paid to HMRC and what is actually paid. The headline was that the tax gap was 5.3%. which represents an estimated £35 billion.

Total tax liabilities for the year were £674 billion.

What is the tax gap?

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.

Why is it measured?

The tax gap provides tool for understanding the relative size and nature of non-compliance. This understanding can be applied in many different ways:

  • it provides a foundation for HMRC’s strategy – considering the tax gap helps the government to understand how non-compliance occurs and how it can be addressed
  • the analysis provides insight into which strategies are most effective at reducing the tax gap
  • it provides important information which helps HMRC understand its long-term performance
  • provides information to the public on tax compliance, creating greater transparency in the tax system.

Why is there a tax gap?

The tax gap arises for a number of reasons. Some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns. Legal interpretation, evasion, avoidance and criminal attacks on the tax system also result in a tax gap.

Analysis

Around £3.7 billion of the gap is estimated to be due to error and £3 billion due to the hidden economy.

The tax gap for wealthy individuals fell from £1.6 billion in 2018/19 to £1.5 billion in 2019/20

£15.1 billion of the gap is attributed to small businesses and £6.1 billion is attributed to large businesses, with £5 billion attributed to medium-sized firms.

Taxpayers paid more than £633.4 billion in tax during 2019/20, an increase of more than £100 billion since 2015/16, when the total revenue paid was £532.5 billion.

The tax gap for Income Tax, National Insurance contributions and Capital Gains Tax is 3.5% in 2019 to 2020 at £12.6 billion which represents the largest share of the total tax gap by type of tax.

VAT

The VAT gap was estimated to be £12.3 billion in tax year 2019 to 2020. This equates to 8.4% of net VAT total theoretical liability.

The VAT gap has increased from 7.0% in tax year 2018 to 2019 to 8.4% in 2019 to 2020. Growth in VAT receipts (1.8%) was slower than the growth in the net VAT total theoretical liability (3.3%).

Behaviour

HMRC estimate that the causes of the tax gap are:

  • Failure to take reasonable care £6.7bn 19%
  • Legal interpretation £5.8bn 16%
  • Evasion £5.5bn 15%
  • Criminal attacks £5.2bn 15%
  • Non-payment £4bn 11%
  • Error £3.7bn 10%
  • Hidden economy £3bn 8%
  • Avoidance £1.5bn 4%

Taxpayers

Tax gap by taxpayer groups:

  • Small businesses £15.1bn 43%
  • Large businesses £6.1bn 17%
  • Criminals £5.2bn 15%
  • Mid-sized businesses £5.0bn 14%
  • Individuals £2.6bn 7%
  • Wealthy £1.5bn 4%

The impact on the tax gap from the coronavirus lockdowns and economic downturn is likely to be first seen in the 2020/21 figures, which will be released next year. It will also be interesting to see how the fallout from Brexit is covered (if at all).

VAT Investigations

By   5 August 2021

Even in these days of increased contactless payments it may be interesting to look at HMRC’s methods of establishing underdeclarations.

HMRC have always taken an interest in cash businesses as they see them as a revenue risk.  Such businesses are usually retail and commonly restaurants and take-aways (which I shall use as an example in this article).  A retail business is obliged to keep certain records.  For sales, this is a record of daily gross takings (DGT) and this is the area I will focus on as it is where “suppression” of income generally occurs.  In a very crude example, the owner, or a member of staff does not ring up a sale and the payment is pocketed.  There are more sophisticated ways in which suppression occurs, but this is the most common.

Even in this day and age where most payments are made by credit or debit cards, there is still significant scope for declarations to be inaccurate.

The methods

There are a number of ways in which HMRC can determine the accuracy of VAT declarations.  These may be from the usual bank and accounts reconciliations, mark up exercises, to, say, counting take-away containers to build up a picture of the turnover.  The following are also ways in which HMRC test the credibility of declarations:

  • Compliance checks

These usually take place in the evenings when a restaurant is open for business (or soon after it closes). Officers gain entrance, question staff, examine records for that and previous days, and remove certain records. From this information they can build up a picture of trading.  These visits are usually unannounced.

  • Invigilation exercise

HMRC observe how the business operates and check that all sales of food and drinks are rung into the till. This is usually with the agreement of the business.

  • Test meals

HMRC staff will purchase a test meal and at a later time check to see if it has been recorded correctly.  It may be that this method will be repeated at a suspect restaurant by different HMRC staff, perhaps in the same evening.  If any of the sales are not recorded correctly, it may be insufficient in itself to create an assessment, but it will confirm suspicions of suppression and lead to further action.

  • Observation

While posing as customers, HMRC will also count the number of covers, the amount of take aways, the number of staff, how orders are taken and paid for, and how payments are made.

  • Surveillance

Members of HMRC staff park outside a restaurant (usually in an unmarked van) and watch the activities of the restaurant.  They count the number of people dining and the numbers of people exiting with take aways. This observation may also record the number of deliveries and other relevant information that they are able to obtain from what they can see.  This exercise may be carried out over a number of days/nights or even weeks.

  • Purchases

In more complex suppression, the value of purchases may also be suppressed in order to present a more credible picture to an inspector.  This may be more common if the purchases are zero rated food (on which the business would not claim input tax). HMRC may attempt to build up a picture of sales by the volume of actual purchases made.  They often check the restaurant’s suppliers’ records to get a full picture of trade.

Information obtained by one of the above methods may, on its own, be insufficient to raise an assessment, but combined with information obtained in different ways will more often than not result in one (should the exercises demonstrate an under-declaration of course).

Taxpayer’s rights

Attendance

HMRC do not have the right to attend a taxpayer’s premises at any time.  The law says that inspections may be carried out “at any reasonable time”. This means that that if a business owner is busy, or the time is outside normal office hours, or there is not access to all of the relevant information, or the request is unreasonable for any other reason, the business owner (or his adviser) may request that an inspector leaves and makes an appointment at a future reasonable time.  This is sometimes easier to do in theory than in practice, but a taxpayer’s rights are set out in The Finance Act 2009, Schedule 36, part II.

A business has no right to refuse a “regular” inspection but these are arranged for an agreed time in any case.

Records

The VAT Act 1994, Schedule 11 states that the requirement to produce records is limited to being provided at such time as HMRC “may reasonably require”. So, again, if HMRC are making demands that a business feels are unreasonable, it is within its rights to refuse to allow access and to make a mutually agreed and acceptable appointment to allow access to premises and records.  This may lead to a discussion, but HMRC do not have unfettered rights to access premises or records.

Best judgement

Regardless of how HMRC have gathered information, any assessment must be made to the best of their judgement and must be “an honest and genuine attempt to make a reasoned assessment of the VAT payable”.   If the business is able to demonstrate that this was not the case, the assessment must be removed.  Broadly, this will entail demonstrating that things that ought to have been considered were ignored, or that things that have been included should not have been.  Generally, the most common ways to challenge an assessment based on the above exercises are; that the period considered was not representative, or not long enough to be representative, or that the tests carried out were insufficient to demonstrate a consistent pattern of trading. There are usually specific facts in each case that may be used to challenge the validity and quantum of an assessment.

Action

Of course, it is hoped that no business which makes accurate declarations is troubled by such investigations.  However, if a business feels that HMRC is being unreasonable with its demands it should seek professional advice before agreeing to permit HMRC access.

Matters change however, if HMRC have a Search Warrant or a Writ of Assistance in which case HMRC are able to compel a business to allow entry or inspection.

As always, we advise that any assessment is, at the very least, reviewed by a business’ adviser.

Businesses still owe £Billions after VAT deferral

By   27 July 2021

Over 25% of VAT registered businesses that were permitted to delay VAT payments as a result of the pandemic still owe HMRC the tax deferred.

The now closed payment scheme permitted VAT registered persons to defer VAT payments due between March and June 2020 and around 600,000 businesses took advantage of the relief. The deadline was 30 June 2021, and it has been stated that over a quarter of business have failed to contact HMRC about their debts and have not made the necessary payments.

The total outstanding, according to The Treasury, is £2.7 billion which represents circa 9% of the VAT take. Of the tax deferred under the scheme, £17.8 billion has been paid and around £13 billion is being paid via monthly instalments.

HMRC have announced its approach to collection VAT debt after Covid19.

It has also become clear is that businesses and consumers have fallen into default during and after the pandemic. It is anticipated that the ability to settle of debts on time will decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief. An article on VAT Bad Debt Relief here.

We would urge, that even if a business cannot make a payment, that it still submits VAT returns on time. It is tempting to accept a centrally issued assessment if it is for a lesser amount than the actual VAT due for the period. However, such action can, and often does, lead to penalties and increased interest from HMRC.

VAT: Partial Exemption -What Is It? What do I need to know?

By   21 July 2021

VAT Basics

As part of our guides to VAT basics, we take a brief look at partial exemption and how it affects a business.

The first point to make is that partial exemption is often complex and costly. In some cases it may be avoided by planning and in others it is a fact of life for a business which needs to be managed properly.

Background

The VAT a business incurs on its expenditure is called input tax. For most businesses this is reclaimed from HMRC on VAT returns if it relates to standard rated or zero rated sales (referred to as “taxable supplies”) that that business makes. Exempt supplies are not to be confused with non-business income which are dealt with under a different regime.

However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred. A business in this position is called partly exempt. Generally, any input tax which directly relates to exempt supplies is irrecoverable. In addition, an element of that business’ general overheads, e.g.; light, heat, telephone, computers, professional fees, etc are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business. The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered. Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC.  A flowchart which illustrates the Standard Method of apportionment is below.

partial exemption flowchart1

Which businesses are affected?

Any business which receives income from the following sources may be affected by partial exemption:

  • Property letting and sales – generally all types of supply of land*
  • Financial services
  • Insurance
  • Betting, gaming and lotteries
  • Education
  • Health and welfare
  • Sport, sports competitions and physical education
  • Cultural services

This list is not exhaustive.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax.  This is known as the option to tax, and it is considered in more detail here.

De Minimis relief

There is however relief available for a business in the form of de minimis limits. Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way. The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year.

As a result, after using the partial exemption method, should the input tax fall below £7,500 (£625 per month) and 50% of all input tax for a year it is recoverable in full. This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year. The quarterly de minimis is consequently £1,875 of exempt input tax which represents spending of under £10,000 net; not a huge amount.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

The value for the de minimis limit has been in place for over 25 years (when it was increased by a huge £25 per month) and it is rather ridiculous that it has not been increased to reflect inflation.  This, coupled with the fact that the VAT rate has increased significantly means that the relief which was once very useful for a business has withered away to such an extent that partial exemption catches even very small businesses which I am sure goes against the original purpose of the relief.

In summary – for a business exemption is a burden not a relief.  It represents a real cost in terms of tax payable, time and other resources, in addition to uncertainty. We often find that this is an area which HMRC examine closely and one which benefits from proactive negotiation with HMRC.

VAT: Collection of tax debts

By   8 July 2021

HMRC has announced its approach to collecting debts after Covid-19.

The Policy Paper explains that the government’s priority is protecting livelihoods and keeping people in work. It states that HMRC has been central to this, for example by pausing many of its debt collection activities and delivering support packages.

However, HMRC is restarting its collection of outstanding debts and will be contacting taxpayers who have fallen behind with VAT and other taxes as a result of the pandemic.

HMRC action

If there is a VAT debt, HMRC will contact a business by phone, post or text message so that they can discuss the situation and agree a way forward. It is important for businesses to respond to these communications as soon as possible because, if there is no reply, HMRC cannot establish whether support is needed or there is a simple refusal to pay.

Time To Pay

HMRC usually discuss payment options, such as a payment plan (called Time to Pay – TTP), which is paying off the debt in affordable instalments.

NB: HMRC typically have more than half a million of TTP arrangements in place and more than nine out of ten of them complete successfully.

As part of agreeing Time to Pay arrangements with businesses, HMRC may also discuss other forms of support available. For example, exploring the range of government-backed lending support like Bounce Back loans and Coronavirus Business Interruption Loans, and agreeing repayment holidays or extending repayment terms.

More information about payment arrangements (Time to pay) is available at How HMRC supports customers who have a tax debt.

Deferral

If a business cannot make a payment immediately, by getting in touch with HMRC it may be possible to arrange a short-term VAT deferral. This means nothing would need to be paid for a set period of time, and no further action to collect the tax debt would be taken until that time has lapsed.

Further powers

Although HMRC state that it will take an “understanding and supportive approach” to tax debt, from September 2021, where businesses are unwilling to discuss a payment plan, or where they ignore attempts to contact them, HMRC may start the process of collecting the debt using its enforcement powers. These powers include; taking control of goods, summary warrants and court action including insolvency proceedings.

As may be seen, ignoring tax debts is not a good policy. Talk to HMRC and see if the various support schemes available are suitable.