VAT: Postponed Accounting available for Section 33 bodies

By Marcus Ward 13 April 2021

HMRC has announced that bodies covered by The VAT Act 1994, Section 33 such as; Local Authorities, Academies, Transport Authorities and the Police can use Postponed Accounting for imports.

Normally, a body cannot account for import VAT on its VAT return if it import goods that it knows will be used solely for non-business purposes. However, this no longer applies to a body that is eligible to reclaim import VAT through a VAT refund scheme (Section 33). Section 33 entities when completing its customs declaration, should select the “making an immediate payment or using a duty deferment account” option.

Section 33 bodies

These entities have special VAT treatment which is effectively the opposite of normal VAT rules. To avoid a cost to the taxpayer, these entities are permitted to specifically recover input tax that relates to non-business activities. Nobody said that VAT was straightforward and in these cases, the VAT rules are inverted!

We act for many Local Authorities and Academies. Please contact us should you, or your clients, have any queries on this matter.

VAT: Changes to late returns and payments penalties announced

By Marcus Ward 8 March 2021

HMRC have announced changes to the penalties applied to failure to submit VAT returns on time. Similar changes will be made for late payment penalties. it is anticipated that these changes will apply from 1 April 2022. Changes will also be made to the way interest is charged.

The new penalty regime replaces the existing default surcharges. The new penalties use a points based system . Businesses will no longer receive an automatic financial penalty if they make a late return. Instead, it will incur penalty points for missed obligations before a financial penalty is levied.

Penalties for late submission of returns

VAT registered businesses will receive a point every time they miss a submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged and the business will be notified. A penalty will be charged for that failure and every subsequent failure to make a submission on time, but the points total will not increase.

The penalty thresholds will be:

Annual returns – 2 points
Quarterly returns – 4 points
Monthly returns – 5 points

Points expiry

Points will have a lifetime of two years calculated from the month after the month in which the failure occurred.

However, points will not expire when a business is at the penalty threshold to ensure an achievement of a period of compliance to reset the points.

Penalties for late payment and interest harmonisation

The new Late Payment Penalties regime will replace the the Default Surcharge, which served as a combined late submission and late payment sanction.

There are two late payment penalties applicable; a first penalty and then an additional or second penalty, with an annualised penalty rate.

First Penalty

A business will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If VAT remains unpaid after Day 15, the business incurs the first penalty. This penalty is set at 2% of the tax outstanding after Day 15. If any of this tax is still unpaid after Day 30, the penalty increases to 4% of the tax outstanding after Day 30.

Second Penalty

If tax remains unpaid on Day 31, a business will begin to incur an additional penalty on the VAT that remains outstanding. It accrues on a daily basis, at a rate of 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the tax that is due.

Time-to-Pay arrangements

HMRC offers the option of requesting a Time To Pay arrangement. This will enable a business to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax.

Interest Harmonisation

HMRC will charge interest on tax that is outstanding after the due date, regardless of whether any Late Payment Penalties have been charged. Interest will apply from the date the payment was due until the date on which it is paid. It will be calculated as simple interest at a rate of 2.5% + the Bank of England base rate.

Where a business has overpaid tax, HMRC will pay Repayment Interest on any VAT due to be repaid either from the last day the payment was due to be received or the day it was received, whichever is later, until the date of repayment. Interest will be paid at the Bank of England base rate less 1% (with a minimum rate of 0.5%).

Reviews and appeals

Businesses will be able to challenge a point or penalty through both an internal HMRC review process and an appeal to the courts (in a similar way to assessments for VAT are challengeable).

More on late returns here and on late payments here.

VAT – Apportionment issues: Complex and costly

By Marcus Ward 16 February 2021

The dictionary definition of the verb to apportion is “to distribute or allocate proportionally; divide and assign according to some rule of proportional distribution”.

So why is apportionment important in the world of VAT and where would a business encounter the need to apportion? I thought that it might be useful to take an overall look at the subject as it is one of, if not the most, contentious areas of VAT. If affects both output tax declarations and input tax claims, so I have looked at these two areas separately. If an apportionment is inaccurate it will either result in paying too much tax, or risking penalties and additional attention from HMRC; both of which are to be avoided!

The overriding point in all these examples is that any apportionment must be “fair and reasonable”.

Supplies

The following are examples of where a business needs to apportion the value of sales:

Retail sales

Retailers find it difficult to account for VAT in the normal way so they use what is known as a retail scheme. There are various schemes but they all provide a formula for calculating VAT on sales at the standard, reduced and zero rate. This is needed for shops that sell goods at different rates, eg; food, clothing and books alongside standard rated supplies. As an example, in Apportionment Scheme 1 a business works out the value of its purchases for retail sale at different rates of VAT and applies those proportions to its sales.

Construction

A good example here is if a developer employs a contractor to construct a new building which contains retail units on the ground floor with flats above. The construction of the commercial part is standard rated, but the building of the residential element is zero rated. The contractor has to apportion his supply between the two VAT rates. This apportionment could be made with reference to floorspace, costs, value or any other method which provides a fair and reasonable result. The value of supplies relating to property is often high, so it is important that the apportionment is accurate and not open to challenge from HMRC. I recommend that agreement on the method used is agreed with HMRC prior to the supply in order to avoid any subsequent issues.

Property letting

Let us assume that in the construction example above, when the construction is complete, the developer lets the whole building to a third party. He chooses to opt to tax the property in order to recover the attributable input tax. The option has no effect on the residential element which will represent an exempt supply. Consequently, an apportionment must be made between the letting income in respect of the shops and flats.

Subscriptions

There has been a great deal of case law on whether subscriptions to certain organisations by which the subscriber obtains various benefits represent a single supply at a certain VAT rate, or separate supplies at different rates. A common example is zero rated printed matter with other exempt or standard rated supplies.

Take away

Most are familiar with the furore over the “pasty tax” and even with the U-turn, the provision of food/catering is often the subject of disputes over apportionment. Broadly; the sale of cold food for take away is zero rated and hot food and eat in (catering) is standard rated. There have been myriad cases on what’s hot and what’s not, what constitutes a premises (for eat in), and how food is “held out” for sale. The recent Subway dispute highlights the subtleties in this area. I have successfully claimed significant amounts of overpaid output tax based on this kind of apportionment and it is always worth reviewing a business’s position. New products are arriving all the time and circumstances of a business can change. A word of warning here; HMRC regularly mount covert observation exercises to record the proportion of customers eating in to those taking away. They also carry out “test eats” so it is crucial that any method used to apportion sales is accurate and supportable.

Opticians

Opticians have a difficult time of it with VAT. Examinations and advice services are exempt healthcare, but the sale of goods; spectacles and contact lenses, is standard rated. Almost always a customer/patient pays a single amount which covers the services as well as the goods. Apportionment in these cases is very difficult and has been the subject of disagreement and tribunal cases for many years; some of which I have been involved in. Not only is the sales value apportionment complex, but many opticians are partly exempt which causes additional difficulties. I recommend that all opticians review their VAT position.

Input tax recovery

Business/Non-Business (BNB)

If an entity is involved in both business and non-business activities, eg; a charity which provides free advice and also has a shop which sells donated goods. It is unable to recover all of the VAT it incurs. VAT attributable to non-business activities is not input tax and cannot be reclaimed. Therefore it is necessary to calculate the quantum of VAT attributable to BNB activities, that VAT which cannot be attributed is called overhead VAT and must be apportioned between BNB activities. There are many varied ways of doing this as the VAT legislation does not specify any particular method. Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc.

Partial exemption

Similarly to BNB if a business makes exempt supplies, eg; certain property letting, insurance and financial products, it cannot recover input tax attributable to those exempt supplies (unless the value is de minimis). Overhead input tax needs to be apportioned between taxable and exempt supplies. The standard method of doing this is to apply the ratio of taxable versus exempt supply values to the overhead tax. However, there are many “special methods” available, but these have to be agreed with HMRC. Partial exemption is often complex and always results in an actual VAT cost to a business, so it is always worthwhile to review the position regularly. Exemption is not a relief to a business.

Attribution

In both BNB and partial exemption situations before considering overheads all VAT must, as far as possible, be attributed to either taxable or exempt and non-business activities. This in itself is a form of apportionment and it is often not clear how the supply received has been used by a business, that is; of which activity is it a cost component?

Business entertainment

At certain events staff may attend along with other guests who are not employed. The recovery of input tax in respect of staff entertainment is recoverable but (generally) entertaining non staff members is blocked. Therefore an apportionment of the VAT incurred on such entertainment is required.

Business and private use of an asset

If a company owns, say, a yacht or a helicopter and uses it for a director’s own private use, but it is chartered to third parties when not being used (business use) an apportionment must be made between the two activities. The most usual way of doing this is on a time basis. Apportionment will also be required in the example of a business owning a holiday home used for both business and private purposes. Input tax relating to private (non-business) use is always blocked.

Motoring expenses

It is common for a staff member to use a car for both business and private purposes. Input tax is only recoverable in respect of the business use so an apportionment is required. This may be done by keeping detailed mileage records, or more simply by applying the Road Fuel Scale Charge which is a set figure per month which represents a disallowance for private use.

The above examples are not exhaustive but I hope they give a flavour to the subject.

If your business apportions, or should apportion, values for either income or expenditure I strongly recommend a review on the method. There is often no “right answer” for an apportionment and I often find that HMRC impose unnecessarily harsh demands on a taxpayer. Additionally, many business are unaware of alternatives or are resistant to challenging HMRC even when they have a good case.

VAT: Postponed Accounting

By Marcus Ward 9 February 2021

VAT Basics

A quick look at Postponed Accounting (PA) and what it means for a business after Brexit

Pre-Brexit (if one remembers such halcyon days) acquisitions from other Member States crossed the UK border without any formalities as there was free movement of goods within all of the EU.

Now that GB is a third country, it is unable to take advantage of the benefits of a single market, so acquisitions become imports and are required to be declared when imported. However, gov.uk has announced he return of PA in an attempt to simplify matters.

PA is accounting for import VAT on a VAT return means a business declares and recovers import VAT on the same return, rather than having to pay it upfront and recover it later. This means neutral cash flow; which is to be welcomed.

The normal rules about what VAT can be reclaimed as input tax will apply.

PA also has the advantage that imported goods are not delayed at the entry port while VAT paperwork and payment is completed. Of course, as experience has demonstrated; there may be other reasons for delays to imports and exports.

Who can use PA?

From 1 January 2021, if a business is registered for VAT in the UK, it will be able to account for import VAT on its return for goods it imports into:

GB (England, Scotland and Wales) from anywhere outside the UK
Northern Ireland from outside the UK and EU

There will be no changes to the treatment of VAT for the movement of goods between Northern Ireland and the EU.

A business does not need approval to account for import VAT on its returns.

How does PA work practically?

VAT is payable on imports of over £135 arriving into the GB from any country in the world, which now includes the EU. Practically, PA is similar to the current Reverse Charge. Output and input VAT is accounted for on the same VAT return.

When completing a customs declaration a business may choose how to account for VAT on its return.

If the Customs Handling of Import and Export Freight (CHIEF) system is used:

On the declaration, the following needs to be entered:

the EORI number starting with ‘GB’ which includes the VAT registration number into box 8, or, if applicable, the VAT registration number in box 44h
‘G’ as the method of payment in Box 47e

If the Customs Declaration Service is used:

The VAT registration is entered number at header level in data element 3/40.

Returns

Box 1 – Include the VAT due in this period on imports accounted for via PA.

Box 4 – Include the VAT reclaimed in this period on imports accounted via PA.
Box 7 – Include the total value of all imports of goods included on your online monthly statement, excluding any VAT.

Using someone to import goods on your behalf

If a business uses a third party to import goods on its behalf (eg; a freight forwarder, customs agent, or fast parcel operator) it will need to inform them how it wants to account for VAT on those imports, so that they can complete the customs declaration correctly.

Alternatives

The use of PA is optional. The alternative is to pay VAT on goods when they enter the UK. This means the use of the “usual” C79 certificates sent by HMRC on which input tax may be reclaimed (rather than any other documentation, eg; invoices).

Northern Ireland

Goods moved to NI from the EU are not impots (NI remains part of the EU, so the old rules on acquisitions still apply and no import VAT is due).

Customs Duty

Alongside additional border formalities, Customs Duties may be payable on certain goods. This Duty is not reclaimable like VAT. Most of the complexities of Customs Duty relate to the rules of origin.

Commentary

PA is a relief for businesses importing from the EU. It is a simple system and will be familiar to any business which applies Reverse Charges. With all the varying changes applying post-Brexit, this is one area which should not affect a business importing from the EU in terms of port delays or negative cash flow. To date, there is no evidence on how well the system is working, but anecdotally, I understand that this part of Brexit changes has not thrown up any issues, unlike other problems which have been widely reported. I stand to be corrected though.

VAT: New guidance on the border with the EU post-Brexit

By Marcus Ward 14 October 2020

This month the government have issued new guidance: The Border with the European Union Importing and Exporting Goods on the Border Operating Model. This provides comprehensive guidance on the movement of goods from 1 January 2021 and adds to previous guidance.

This is important information for any business moving goods between GB, the EU and NI and needs to be considered for tax planning and general preparation for Brexit. These rules will likely come into force regardless of whether the UK has negotiated an agreement with the EU.

The introduction comes in three stages:

Stage One – January 2021
Stage Two – April 2021
Stage Three – July 2021

Stage One

Business will need to:

understand the requirements of EU Member States. The necessary processes must have been done and documentation completed to comply with these requirements
obtain a GB EORI number to move goods to or from the UK
if undertaking any EU customs processes, businesses will need an EU EORI
importers; check which goods are on the controlled goods list- if they are on the controlled goods list, a full customs declaration is required
if importing non-controlled goods, decide whether to delay the customs declaration for up to six months or complete full customs declarations on import
decide how to complete customs formalities: Most businesses are expected to use a customs intermediary
consider obtaining a Duty Deferment Account (DDA). A DDA allows holders to delay customs duty, excise duty and import duty, to be paid once a month rather than on individual consignments
check to see if a facilitation would be of benefit. There are a number of facilitations, including the Common Transit Convention
if importing live animals or high-priority plants, business needs to be prepared for submitting additional documentation and checks taking place at point of destination
exporters; be prepared to submit customs export declarations
hauliers; be ready to use the “Check an HGV is ready” service

Stage Two

If businesses are importing Products of Animal Origin (POAO) or a regulated plant and plant product; they will need to:

to submit pre-notification and the relevant health documentation

Stage Three

Businesses must:

meet full customs requirements including submitting declarations, regardless of whether it is a controlled or a non-controlled good
pay VAT and excise duty where necessary
submit safety and security declarations
be prepared for customs compliance checks either at port or an inland site
be prepared for relevant SPS goods to enter GB via a Border Control Post either at port or an inland site, accompanied by sanitary and phytosanitary (SPS) documentary requirements

General

From 1 January 2021

Customs Declarations – Importers and exporters will have to complete UK and EU customs declarations after the end of the transition period. Some locations will require pre-lodgement of customs declarations prior to the movement of goods, which will particularly affect ‘roll on-roll off’ (RoRo) movements
Customs Duties – Importers will need to ensure that any customs duties applicable to their goods under the new UK Global Tariff are paid. Importers will need to determine the origin, classification and customs value of their goods. There are options available to defer any payment that is due
VAT will be levied on imports of goods from the EU, following the same rates and structures as are applied to Rest of World (RoW) imports. VAT registered importers will be able to use postponed VAT accounting. Non-VAT registered importers have the same options available to report and pay import VAT as they do for customs duties

Businesses will need to review their processes for dealing with cross-border goods, both between the EU and Northern Ireland. This includes; customs declarations, compliance, provision of data, obtaining a duty deferment account and GB/EU EORI numbers as necessary. We also advise liaising with suppliers and customers to ensure, as far as possible, that transactions are as seamless as possible in these challenging times.

Ten Questions every business should ask about VAT

By Marcus Ward 14 October 2020

1. Am I sure that a VAT inspection would not find any errors?

An inspection can result in significant assessments, penalties and interest, apart from a business becoming “known” to HMRC. Peace of mind is a valuable benefit for a business owner too!

2. Am I sure that I am reclaiming as much VAT as possible?

We often find that businesses miss out on recovering input tax, this clearly results in an actual cost.

3. Do I take full advantage all available VAT reliefs, customs exemptions and duty refund schemes?

Failure to do so will create a tax cost and may be putting a business in a less competitive position.

4. Am I up to date on the indirect tax developments in my key markets?

Indirect tax changes rapidly, and so does the market place. Being unaware of changes that affect you may result in VAT being overpaid, or penalties being levied if you have underdeclared tax. It may also put you at a competitive disadvantage.

5. Have I considered the impact of tax rate changes on my pricing and margin, and have I taken the necessary measures?

Budgeting is affected by VAT. Failure to consider indirect taxes may eat into profit.

6. Do I collect all the data about my customers and transactions that could be required by tax authorities?

As in many VAT circumstances, getting it wrong or missing something results in penalties.

7. Do I comply with all indirect tax requirements in the jurisdictions where I operate or where my customers belong?

VAT and GST does exist outside the UK and ignoring overseas indirect tax obligations may result in action being taken by foreign authorities which will prove to be very uncomfortable and expensive. It is important to understand the rules for indirect tax in each country/area you trade. Don’t get caught out.

8. Do I have the tools to analyse my indirect tax flows and data?

Allocating sufficient technical and human resources to VAT is important. Seeking professional advice at the appropriate time is also prudent.

9. Could changes in the way my business is structured or how transactions are organised improve my indirect tax position and/or reduce complexity?

Saving money and reducing tax complications must be near the top of every business’ wish list. Seeking professional advice on structuring a business or a transaction goes a long way to achieving this

10. Is my business using the right VAT scheme?

There are many special schemes that a business may use, from the Flat Rate Scheme to Margin Schemes. Most are optional, but some, like the Tour Operators’ Margin Scheme are compulsory. Choose the wrong one, or being unaware of a beneficial scheme could cost.

It is important to constantly monitor a business’ VAT position. The nature of trade changes, technology changes, case law changes and the VAT rules are constantly in a state of flux. It is easy to assume that everything is alright because it has always been done that way, but there may be significant exposures and missed opportunities out there. Things will also change once the terms of Brexit have been agreed (or not). We offer services from a basic healthcheck to a full technical review. A review will let you rest easy in your bed if nothing else!

VAT: Retrospective claims – standard of proof. NHS Lothian case

By Marcus Ward 24 April 2020

Latest from the courts

An interesting and helpful comment was made by the judge in the NHS Lothian Health Board Court of Session (the Scottish equivalent of the Court of Appeal) case.

Background

The case involved a claim for overpaid VAT going back to 1974. The primary issue was not the existence of the taxpayer’s claim to recover overpaid VAT, but the quantification of that claim, and in particular whether the claim can be quantified with sufficient accuracy to permit an order for repayment of tax to be made. In the previous case it was held that the onus of proving that an amount of tax had been paid and not recovered rested upon the taxpayer and that the standard of proof was the balance of probabilities and Lord Drummond Young agreed with that proposition here.

Judgement

The specific comments which will be of assistance with businesses with similar clams were:

“The fundamental problem in such cases is that primary evidence does not exist owing to the lapse of time. The absence of such evidence, at least in cases such as the present, is not the fault of the taxpayer, and the lack of evidence should not be held against the taxpayer,”

Outcome

The court urged Tax Tribunals (First Tier Tribunal – FTT and Upper Tribunal – UT) to apply a flexible approach to the burden and standard of proof when making decisions in similar cases; of which there is a considerable number. This approach should apply to so called “Fleming” claims and others in respect of overpaid output tax. We understand that 700 such claims were made by NHS authorities in Great Britain alone, and circa 200 of these remain unresolved.

Commentary

In most cases, a taxpayer is only required to retain records for six years. So the comments made in this case should bolster the chances of success for claims made by other businesses, whether they be for overpaid output tax or underclaimed input tax. There are many and varied reasons why sufficiently detailed could be unavailable; we are looking at a potential 46-year time span. In 1974 record keeping was a different world and physical/manual records were usually the only option. It seems only reasonable that HMRC should make the allowances suggested in this case when it is agreed that a claim is valid in all other respects.

Action

If you, or your client, have had a claim rejected on the basis of insufficient supporting primary evidence, it may be worthwhile revisiting it on the basis of this decision. It sets out helpful and clear guidance and provides businesses with effective, appropriate tax relief where applicable.

VAT: Payment handling charges – The Virgin Media case

By Marcus Ward 5 February 2020

Latest from the courts

In the Virgin Media Ltd First Tier Tribunal (FTT) case a number of issues were considered. These were:

whether payment handling charges were exempt via: The VAT Act 1994, Schedule 9, Group 5, items (1) and (5)
whether the supply was separate from other media services
which VAT group member made the supply?
whether there was an intra-group supply
whether there was an abuse of rights

Background

Virgin Media Limited (VML) provided cable TV, broadband and telephone services (media services) to members of the public. It was the representative member of a VAT Group which also contained Virgin Media Payment Limited (VMPL).

If customers choose not to pay by direct debit, they were required to pay a £5 “handling charge”. The handling charge was paid to VMPL and passed to VML on a daily basis. The issue was; what was the correct VAT treatment of the charge?

Contentions

The appellant argued that the £5 charge was optional for the customer and the collection of it was carried out by VMPL and was exempt as the transfer or receipt of, or any dealing with, money. Further, that, despite being members of the same VAT group, there was nothing in the legislation which forced the VAT group to treat supplies by separate entities within that group as a single supply to a recipient outside the group.

HMRC contended that there was a single taxable supply and thus no exempt services were provided and, in fact, VMPL was not making a supply at all (and therefore not to VML as the group representative member). In the first alternative, if it were decided that there was a supply, such a supply was an ancillary component of a single taxable supply by VML as representative group member and not by VMPL as per the Card Protection Plan case. In the second alternative, if both decisions above went against HMRC, that the service provided by VMPL fell outside the exemption so that it was taxable in its own right.

Decision

It was found that:

there was a single supply made to customers
the supply was made by VML as the representative member of the VAT group
the £5 handling charge was an integral part of the overall supply
if not integral, the handling charge was an ancillary supply such that it took on the VAT treatment of the substantive supply
therefore, VMPL does not make any supply to the end users of the overall service
if VMPL does make a supply, it is an intra-group supply to VML which s disregarded for VAT purposes
VMPL does not have a free-standing fiscal identity for VAT purposes
if the FTT is wrong on the above points and VMPL does make a supply of payment handling services to customers, these supplies are taxable and not exempt (per Bookit and NEC) as the supply is simply technical and administrative and does not amount to debt collection
the arrangements do not constitute an abusive practice. The essential aim of the transactions are not to secure a tax advantage so HMRC’s argument on abuse fails

Therefore, the appeal was dismissed and a reference to the CJEU was considered inappropriate and output tax was due on the full amount received by the group from customers.

Summary

This was a complex case which suffered significant delays. It does help clarify a number of interconnected issues and demonstrates the amount of care required when planning company structures and the VAT analysis of them.

VAT: Top 10 Tips for small businesses and start-ups

By Marcus Ward 17 December 2019

At some point it is likely that a small business or start-up will need to consider VAT. Here are a few pointers:

Should you be registered for VAT?

If your income is above £85,000 pa of taxable supplies, you have no choice. But you can voluntarily register if below this threshold. There are significant penalties for failure to register at the correct time.

Advantages of VAT registration: VAT recovery on expenses plus, perhaps; gravitas for a business
Disadvantages: administration costs plus a potential additional cost to customers if they are unable to recover VAT charged to them (eg; they are private individuals) which could affect your competitiveness

More here

Even non-registered businesses can save VAT

Look to use non-VAT registered suppliers, or non-EU suppliers (however, this may count towards your registration turnover)
If you are purchasing or leasing commercial property, consider looking for non-opted property or raise the issue of your inability to recover VAT in negotiations on the rent
Take advantage of all zero and reduced rates of VAT reliefs available
Challenge suppliers if you consider that a higher rate of VAT has been charged than necessary

Consider using the appropriate simplification scheme

Flat Rate Scheme (1% discount in first year of registration)
Cash Accounting (helps avoid VAT issues on bad debts)
Annual Accounting (can generate real, cash flow and/or administrative savings)
Margin schemes for second-hand goods

Further details here and here

Make sure you recover all pre-registration and/or pre-incorporation VAT

VAT incurred on goods on hand (purchased four years ago or less) and services up to six months before VAT registration is normally recoverable.

Are your VAT liabilities correct?

Many businesses have complex VAT liabilities (eg; financial services, charities, food outlets, insurance brokers, cross border suppliers of goods or services, health, welfare and education service providers, and any business involved in land and property). A review of the VAT treatment may avoid assessments and penalties and may also identify VAT overcharges made which could give rise to reclaims. Additionally, these types of business are often restricted on what input tax they can reclaim. Check business/non-business apportionment and partial exemption restrictions.

VAT Payment Problems – Q & As

By Marcus Ward 12 November 2019

If you can’t pay your VAT bill, please do not put your head in the sand, the problem will not go away. Here are some answers to the most commonly asked VAT payment problems.

Q: I have received a demand notice for payment of VAT. Why?

A: HMRC have not received payment of the VAT liability that is described in the demand notice. You should therefore pay the outstanding debt without delay so as to avoid further recovery action. HMRC take prompt action to recover debts.

Q: I am not able to pay the debt immediately because of a temporary cash-flow problem. What should I do?

A: You should make urgent contact with your bank or your financial adviser to explore means of overcoming these temporary financial difficulties.

Q: I have consulted the bank/financial adviser, but they are unable to help. What else can I do?

A: Without further delay contact the Regional Debt Management Unit whose address appears on the demand notice. They may be able to help you by agreeing a brief period in which to pay the debt. They are usually helpful and will consider carefully all practical options for settlement. However, if these do not produce a solution or they do not receive a response to their request for payment, they may, like other creditors, take action to recover the money they are owed.

Q: What is the Default Surcharge?

A: Default Surcharge is a civil penalty to encourage businesses to submit their VAT returns and pay the tax due on time.

Q: When will a Default Surcharge be issued?

A: A business is in default if it sends in its VAT return and or the VAT due late. No surcharge is issued the first time a business is late but a warning (a Surcharge Liability Notice) is issued. Subsequent defaults within the following twelve months (the “surcharge period”) may result in a surcharge assessment. Each time that a default occurs the surcharge period will be extended. There is no liability to a surcharge if a nil or repayment return is submitted late, or the VAT due is paid on time but the return is submitted late (although a default is still recorded).

Q: How much is it?

A: The surcharge is calculated as a percentage of the VAT that is unpaid at the due date. If no return is submitted the amount of VAT due will be assessed and the surcharge based on that amount. The rate is set at 2% for the first default following the Surcharge Liability Notice, and rises to 5%, 10% and 15% for subsequent defaults within the surcharge period. A surcharge assessment is not issued at the 2% and 5% rates if it is calculated at less than £200 but a default is still recorded and the surcharge period extended. At the 10% and 15% rates the surcharge will be the greater of the calculated amount or £30.

Q: What sort of assessments are sent out?

A: An assessment may be issued if a VAT return is not submitted by the due date. The amount may be based on previous returns. If a business does not submit its returns time after time, the assessment value will increase. An officer may also issue an assessment after a visit, if they have found errors in the amount of tax declared on previous returns. Both types are included in the taxpayers’ debt and are collected in the normal way if they are not paid promptly.

Help

There are a number of schemes available which may help cashflow or possibly reduce the amount of VAT you pay.

Cash Accounting – where you only pay VAT to HMRC when you have received payment from your customer.

Annual Accounting – where you make set monthly payments and make one return a year with an adjusting payment.

Flat Rate Scheme – where you pay a set percentage of your turnover rather than calculating output tax less input tax.

Bad Debt Relief – where you are able to reclaim VAT relief on your bad debts.

Please contact us if VAT payments are proving a problem for your business. Negotiation with HMRC is possible.