Food that is too hot to eat can be classed as cold food for VAT purposes.
Tag Archives: vat-penalty
VAT: How to avoid MTD penalties
HMRC has published a new Factsheet CC/FS69 which sets out compliance checks to be made to avoid penalties for Making Tax Digital (MTD).
Under MTD, VAT-registered businesses must keep certain records digitally and file their VAT returns using compatible software.
The Factsheet covers:
- signing up to MTD – go to www.gov.uk and search for ‘VAT record keeping’. A business must have functional compatible software in place before you signing up
- filing VAT return using functional compatible software. This needs to be able to record and store digital records, provide HMRC with information and VAT returns from the data held in those digital records, and receive information from HMRC
- keep records digitally in an “electronic account” (all transactions must be contained in an electronic account but there is no need to scan paper records like invoices and receipts)
- use digital links to transfer or exchange data
- use the checking functions within the software (to ensure returns are correct before being filed)
Penalties
HMRC levy penalties for MTD for the following actions:
- filing returns not using use functional compatible software. A penalty applies for every return filed in error
- not keeping records digitally, a penalty applies for every day on which a business does not meet this requirement
- not using digital links to transfer data between pieces of software, a penalty applies for every day on which a business does not meet this requirement
- not signing up to MTD
These penalties apply in addition to existing penalties and interest charged for a range of misdemeanours from late returns to deliberate underdeclarations.
New VAT penalties and interest charges
Further to my article explaining the changes to late returns and payment penalties, HMRC has now published further guidance on new regime.
These changes, originally intended to be introduced on I April 2022 have been delayed until 1 January 2023 (for VAT periods starting on, or after, this date).
From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.
Period of familiarisation
HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.
More on late returns here and on late payments here.
VAT: Avoiding a Default Surcharge. Reasonable Excuse – Update
I have looked at the Default Surcharge regime in detail here but as statistics show more business to be in default (which is probably accurately attributable, inter alia, to the pandemic) I consider how a penalty may be mitigated, by the provision of a “Reasonable Excuse”. HMRC has updated its internal guidance on Reasonable Excuse this month.
Specifically: HMRC state that “…where a person has not been able to meet an obligation on time due to the impact of COVID-19, HMRC will usually accept that they will have a reasonable excuse.”
What is a Default Surcharge?
The Default Surcharge is a civil penalty issued by HMRC to encourage businesses to submit their VAT returns and pay the tax due on time.
A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.
More on late returns here and on late payments here.
New rules forthcoming
It is noted that there is a new regime for penalties, details here although these changes have been delayed until 1 January 2023
Reasonable Excuse
If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge. The onus is on a business to satisfy HMRC that it has a Reasonable Excuse.
Definition
There’s no statutory definition of Reasonable Excuse and it will depend on the particular circumstances of a case. A Reasonable Excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a Reasonable Excuse.
What may count as a Reasonable Excuse?
HMRC give the following examples:
- “your partner or another close relative died shortly before the tax return or payment deadline
- you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
- you had a serious or life-threatening illness
- your computer or software failed just before or while you were preparing your online return
- service issues with HMRC online services
- a fire, flood or theft prevented you from completing your tax return
- postal delays that you could not have predicted
- delays related to a disability (including mental health) you have”
This list is not exhaustive.
What is NOT a reasonable excuse
Statute identifies two specific situations that are not a reasonable excuse:
- lack of funds to pay any VAT due, or
- reliance on any other person to perform a task, where there has been a delay or inaccuracy on that person’s part.
There can be exceptions to these two exclusions. For example, an insufficiency of funds may be a reasonable excuse where the insufficiency is a result of events outside the person’s control.
HMRC also states that these situations would not normally be accepted, on their own, as a reasonable excuse:
- pressure of work
- lack of information
- lack of a reminder from HMRC
Facts
HMRC will establish what facts the business believes gave rise to a Reasonable Excuse. The facts may include:
- the taxpayer’s beliefs
- the taxpayer’s own experiences and relevant attributes
- the situation of the taxpayer at any relevant time
- acts carried out by the taxpayer or someone else
- acts that the taxpayer or someone else should have carried out but did not.
Case Law
Although not a VAT issue, in the Upper Tribunal (UT) case of Christine Perrin [2018] UKUT 156 [TC], the judge provided guidance on how the Tribunal should approach a Reasonable Excuse defence. There are four steps:
- establish what facts the taxpayer asserts give rise to a reasonable excuse
- decide which of those facts are proven
- if those proven facts amount to an objectively reasonable excuse for the default
- having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time
Appeal
If HMRC refuse to accept an advance of a Reasonable Excuse and the Default Surcharge is maintained, there are two potential remedies:
If a business disagrees with a decision that it is liable to a surcharge or how the amount of surcharge has been calculated, it is possible to:
- ask HMRC to review your case (A Statutory Review)
- have your case heard by the Tax Tribunal
If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension (SLNE) was sent. The letter should give the reasons why a business disagrees with the decision.
We are able to assist with all disputes with HMRC and have an enviable record of succeeding in having Default Surcharges removed.
VAT Inspections …and how to survive them
VAT Inspections
The first point to make is that inspections are usually quite standard and routine and generally there is nothing to worry about. They are hardly enjoyable occasions, but with planning they can be made to go as smoothly as possible. As an inspector in my previous life, I am in a good position to look at the process from “both sides”. If you are concerned that the inspection is not routine (for any reason) please contact us immediately.
Background
Typically, the initial meeting will begin with an interview with the business owner (and/or adviser) to go through the basic facts. The inspector will seek to understand the business and how it operates and will usually assess the answers with specific tests (further tests will be applied to the records). After the interview the inspector(s) will examine the records and will usually have further queries on these. More often than not they will carry out; bank reconciliations, cash reconciliations, mark-up exercises, and often “references” which are the testing of transactions using information obtained from suppliers and customers. There are many other exercises that may be carried out depending on the type of business. Larger businesses have more regular inspections where one part of the business is looked at each meeting. The largest businesses have more or less perpetual inspections (as one would expect). The length of the inspection usually depends on:
- Size of the business
- Complexity of the business
- Type of business (HMRC often target; cash businesses, the construction industry, property investment, partially exempt businesses, charities and NFP entities, cross-border transactions and financial services providers amongst others)
- Compliance history
- Associated/past businesses
- Intelligence received
- Errors found
- Credibility of the business owner and records
The above measurements will also dictate how often a business is inspected.
More details on certain inspections/investigations here
The initial inspection may be followed by subsequent meetings if required, although HMRC state that they aim is to conclude matters at the time of the first meeting.
The inspection – how to prepare
- Ensure that both the person who completes the VAT returns and the person who signs the VAT returns will be available for all of the day(s) selected
- Arrange with your adviser, to be available to you and the inspector on the days of the inspection
- Thoroughly review your VAT declarations and have ready, if relevant, any disclosures or other declarations you consider you need to make to HMRC at the start of the inspection (this should avoid penalties)
- Have available all VAT returns and working papers for the last four years or the period since you were registered for VAT including:
- Annual accounts
- The VAT account and all related working papers
- All books and accounts, cashbook, petty cashbook, sales and purchases day books
- Sales and purchase invoices
- All supporting documentation, eg; contracts, correspondence, etc.
- Bank statements
- VAT certificate and certificate of registration
- Any other documentation relating to “taxable supplies”
- Have available the full VAT correspondence files ensuring that they are fully up-to-date
- Ensure you have full information on any; one-off, unusual or particularly high value transactions
The inspection – during the visit
- Ask the inspector(s) to identify themselves by name on arrival (they carry identity cards)
- Be polite, friendly and hospitable as far as possible
- Make a desk or space available for them to work near to you – in this way you can oversee/overlook what they do
- Only allow access to the files that form part of your “VAT Records”
- Enable the VAT inspector, if they ask, to inspect your business premises (and have someone accompany them)
- Be cautious with your answers to seemingly “innocent” questions and comments. If in doubt ask for time to check, or that the question be put in writing (never guess or provide an answer which you think HMRC want)
- If something inconsistent is found (or suggested) ask for full details and take note of all of the documentation to which the query relates – this will enable you to provide necessary information to your adviser
The inspection – at the end of the visit
The inspector should:
- Explain the main work they have done. For example which VAT accounting periods they reviewed
- Explain any areas of concern they have, discuss them and seek to agree any future action that needs to be taken; and
- Illustrate as fully as possible the size and reason for any adjustment to the VAT payable, and describe how the adjustment will be made
You should:
- Obtain a summary of the inspection from HMRC (not always an easy task)
- Ask the inspector to put all of HMRC’s concerns about your business to you in writing
- Confirm with the inspector all time limits for providing additional information to HMRC
After the inspection
HMRC will write to you confirming:
- Any issues identified
- Further information required
- Improvements required to record keeping
- Any corrections required
- Whether VAT has been over or under paid
- Any penalties and interest which will be levied
- Deadlines for payment.
On a final point: Never simply assume that the inspector is correct in his/her decision. It always pays to seek advice and challenge the decision where possible. Even if it is clear that an error has been made, mitigation may be possible.
We can provide a pre-inspection review as well as attending inspections if required. It is quite often the case that many HMRC enquiries may be nipped in the bud at the time of the inspection rather than becoming long drawn out sagas. We can also act as negotiator with HMRC and handle disputes on your behalf.
VAT Registration
VAT Basics
A business must register for VAT with HMRC if its VAT taxable turnover is more than £90,000 in a 12 month period.
Taxable Turnover
Taxable turnover means the total value of everything that a business sells that is not exempt or outside the scope of VAT.
Registration is mandatory if turnover exceeds the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – at the end of every month a business is required to calculate income (not profit) over the past year.
A business may also register voluntarily, which may be beneficial if it wants to reclaim input tax it has incurred.
Catches
There are some transactions that must be included in the turnover calculation which can easily be missed:
- goods a business hired or loaned to customers
- business goods used for personal reasons
- goods which were bartered, part-exchanged or given as gifts
- services a business receives from suppliers in other countries which are subject to a reverse charge
- building work over £100,000 a business did for itself
- zero-rated items (these are still taxable although no VAT is charged)
Timing
A business must register within 30 days of the end of the month when it exceeded the threshold. The effective date of registration (EDR) is the first day of the second month after a business goes over the threshold.
Future test
A business must mandatorily register for VAT if it expects its VAT taxable turnover to be more than £90,000 in the next 30-day period. This may be because of a new contract or a other known factors.
Registration exception
If a business has a one-off increase in income it can apply for a registration ‘exception’. If its taxable turnover goes over the threshold temporarily it can write to HMRC with evidence showing why the taxable turnover will not exceed the deregistration threshold (currently £88,000 in the next 12 months). HMRC will consider an exception and write confirming if a business will receive one. If not, HMRC will compulsory register the business for VAT.
Transfer of a going concern (TOGC)
If a VAT-registered ongoing business is purchased the buyer must register for VAT from the purchase date. It cannot wait until its turnover exceeds the threshold.
Businesses outside the UK
If a business belongs outside the UK, there is a zero threshold. It must register as soon as it supplies any goods and services to the UK (or if it expects to in the next 30 days).
Late registration
If a business registers late, it must pay the VAT due from when it should have registered (the EDR). Further, it will receive a penalty depending on how much it owes and how late the registration is. The rates based on the VAT due are:
- up to 9 months late – 5%
- between 9 and 18 months – 10%
- over 18 months = 15%.
How to register
A business can register online. By doing this it will register for VAT and create a VAT online account via which it will submit VAT returns.
Between application and receiving a VAT number
During the wait, a business cannot charge or show VAT on its invoices until it receives a VAT number. However, it will still be required to pay the VAT to HMRC for this period. Usually, a business will increase its prices to allow for this and tell its customers why. Once a VAT number is received, the business can then reissue the invoices showing the VAT.
Purchases made before registration
There are time limits for backdating claims for input tax incurred before registration. These are:
- four years for goods still on hand at the EDR
- six months for services
Once registered
A business’ VAT responsibilities. From the EDR a business must:
- charge the right amount of VAT
- pay any VAT due to HMRC
- submit VAT Returns
- keep appropriate VAT records and a VAT account
- follow the rules for ‘Making Tax Digital for VAT’
- keep business details up to date (there are penalties for failing to inform HMRC of changes)
VAT groups
VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration). There are pros and cons of grouping set out here.
Oops! – Top Ten VAT howlers
I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”. While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:
- Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
- Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT triggerpoint can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
- Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
- Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
- Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
- Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
- Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
- Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
- Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
- Forgetting the impact of the Capital Goods Scheme (CGS). The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.
So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.
Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!
VAT: Fraudster ordered to pay £37 million
Latest from the courts
A high level fraudster who skipped his trial and fled to Dubai has been ordered to pay more than £37 million. Failure to do so will result in ten years in prison. He played a major role in this missing trader fraud (MTIC) which involves the theft of Value Added Tax from HMRC. He was part of a conspiracy to use a network of companies and a huge number of transactions to cover up the theft of VAT.
Adam Umerji, 43, was convicted in his absence of offences of conspiracy to cheat the government’s revenue and conspiracy to transfer criminal property, in a prosecution conducted by the CPS Specialist Fraud Division after a complex criminal investigation by HMRC.
Background
Missing trader fraud (also called missing trader intra-community fraud or MTIC fraud) involves the theft of VAT from a government by fraudsters who exploit VAT rules, most commonly the EU rules which provide that the movement of goods between Member States is VAT free. There are different variations of the fraud but they generally involve a trader charging VAT on the sale of goods and absconding with the VAT (instead of paying the VAT to the government’s taxation authority). The term “missing trader” is used because the fraudster has gone missing with the VAT.
A common form of missing trader fraud is carousel fraud. In carousel fraud, VAT and goods are passed around between companies and jurisdictions.
Businesses still owe £Billions after VAT deferral
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 registration delays – latest
Anecdotally, we understand that some businesses applying for registration are experiencing significant delays. Further, attempts to contact HMRC by email is often difficult, and telephones are regularly not answered (although we understand that some people have enjoyed more success with the webchat). Also, the Non-Established Taxable Persons (NETP) office has moved, right at the time when more EU businesses need to register in the GB due to Brexit. This has created an even longer backlog.
Confirmation
The Business Delivery Team at HMRC has confirmed that it is attempting to deal with a very high number of applications, which are being delayed for various reasons (not least by the sheer volume one expects). The department has also stated that the following actions and checks will assist with faster processing times and urges applicants to check that all information requested set out here is included with the application to avoid any further delays. The most salient being to use the online method rather than the hard copy. However, this is not always possible if additional documentation needs to be sent.
How to avoid common errors identified by HMRC
- ensure that the addresses provided on the VAT 1 form matches the business’s principal place of business (PPOB)
- check that the notification of a trade classification matches the supplies the business makes
- the VAT treatment of activities must be correctly identified
- the correct person must sign the application – eg; for a corporate body it must be a director, company secretary or authorised signatory or an authorised agent
- ensure the correct registration date (effective date of registration – EDR) is given. And that the EDR is accurate considering the circumstances that have been outlined for requesting registration elsewhere in the application
- the bank account details provided must be in the name of the taxable person
And I will add; do not forget form VAT5L when registering a business which is involved in land and property transactions.
The Business Delivery Team also stated that “We are also considering how we can improve the registration process by resolving more cases in real time by telephone and engaging with customers in a different way to gather any further required information. We’ll tell you more about this shortly.”
While any improvement in communication is to be welcomed, it remains to be seen what practical measures will be implemented to speed up registration processing and how soon these will be put in place.