John Harrison and Company - Charter Accounts

Since April 2010 many VAT registered businesses have been required to submit their VAT returns online and pay any VAT electronically. This requirement is to be extended to all VAT registered businesses from 1 April 2012 apart from a very small number who will be exempt.

Who is affected?

Businesses with annual turnover of more than £100,000 (measured as the VAT exclusive amount for the 12 months ended 31 December 2009) already have to file their VAT returns online. In addition, those which have registered for VAT from 1 April 2010 have also been required to submit returns online irrespective of turnover levels.

From April 2012 all remaining businesses must start to file online and pay electronically if this is not already being done.

The only exemptions are if either of the following applies:

• You are subject to an insolvency procedure or
• HMRC is satisfied that your business is run by practising members of a religious society, whose beliefs prevent them from using computers.

What action does your business need to take to be ready for this change?

If we already act as your authorised VAT agent and file your VAT return, then we will contact you to discuss whether these changes have an impact on the services we provide. However, it is important that you are made aware of these important developments as you are still legally responsible for paying any VAT due and ensuring we have the relevant information to prepare the VAT return on time. You may also need to review the way in which you currently pay any VAT due (see below).

Do you currently prepare your own VAT return?

If you currently prepare and submit your own VAT return, you will need to ensure that you make the appropriate arrangements to make the online submissions as necessary. The precise actions you need to take depend on whether your business is already registered for other HMRC online services.

• If you have already registered for another HMRC online service then you should be able to add VAT online to the list of services which are available to you.

• If your business is not yet registered for any online services then you will need to register, sign up and activate the VAT online service. An account needs to be set up at least seven days before you can complete and file your VAT return online.

HMRC have issued a step by step guide for signing up which can be accessed at www.hmrc.gov.uk/vat/sign-up-for-online.pdf

When you enrol for VAT online services you can also arrange to receive free email reminders to let you know when your VAT returns are due otherwise you will not receive a prompt from HMRC and you will have to set up your own reminders.

If you would, alternatively, like more information on the services we offer in this area, please do not hesitate to contact us.

Payment of VAT

All businesses must ensure that payment is made to HMRC by the normal calendar month date.

Where payment is made by one of the approved electronic methods, an extension of a further seven calendar days is generally available. Exceptions can apply. In particular, if the due or extended date falls on a bank holiday or weekend, ensure the payment has cleared the HMRC bank account beforehand.

For those that file online, payments must be done electronically. In reality many businesses already do but you may need to check that you are using an approved electronic method.

Further, HMRC are now able to accept payments made using the Faster Payments Service. This will allow you to make faster electronic payments, typically via internet or telephone banking, enabling them to be processed on the same or next day.

Change is often difficult but we are here to help. Please do get in touch if you would like to discuss any of these matters in more detail.

This briefing focuses on VAT matters of relevance to the smaller business. A primary aim is to highlight common risk areas as a better understanding can contribute to a reduction of errors and help to minimise penalties. Another key ingredient in achieving that aim is good record keeping, otherwise there is an increased risk that the VAT return could be prepared on the basis of incomplete or incorrect information. This aspect is not considered further here but useful guidance can be found in www.hmrc.gov.uk/factsheet/record-keeping.pdf

Input VAT matters

Only registered traders can reclaim VAT on purchases providing the expense is incurred for business purposes and there is a valid VAT invoice for the purchase. Only VAT registered businesses can issue valid VAT invoices. VAT cannot be reclaimed on any goods or services purchased from a business that is not VAT registered. Proforma invoices should not be used as a basis for input tax recovery as this can accidentally lead to a duplicate VAT recovery claim.

Most types of supply on which VAT recovery is sought must be supported by a valid VAT invoice. This generally needs to be addressed to the trader claiming the input tax. A very limited list of supplies do not require a VAT invoice to be held to support a claim, providing the total expenditure for each taxable supply is £25 or less (VAT inclusive). The most practical examples of these are car park charges and certain toll charges.

The following common items however never attract input VAT and so no VAT is reclaimable - stamps, train, air and bus tickets, on street car parking meters and office grocery purchases like tea, coffee and milk!

Business purpose

This is often an area of contention between taxpayers and HMRC as VAT is not automatically recoverable simply because it has been incurred by a VAT registered person. In assessing whether the use to which goods or services are put amounts to business use (for the purpose of establishing the right to deduct input tax), consideration must be given as to whether the expenditure relates directly to the function and operation of the business or merely provides an incidental benefit to it.

Private and non-business use

In many businesses, personal and business finances can be closely linked and input tax may be claimed incorrectly on expenditure which is partly or wholly for private or non-business purposes.
Typical examples of where claims are likely to be made but which do not satisfy the ‘purpose of the business’ test include:

• expenditure related to domestic accommodation
• pursuit of personal interests such as sporting and leisure orientated activities
• expenditure for the personal benefit of company directors/proprietors and
• expenditure in connection with non-business activities.

Where expenditure has a mixed business and private purpose, the related VAT should generally be apportioned and only the business element claimed. Special rules apply to recover input tax claimed on assets and stock (commonly referred to in VAT as goods) when goods initially intended for business use are then put to an alternative use.

Example: Three laptops are initially bought for the business and input VAT of £360 in total is reclaimed. One is then gifted by the business owner to his son so VAT will have to be accounted for to HMRC of £120 (1/3 x £360)

Business entertainment

VAT is not reclaimable on many forms of business entertainment but VAT on employee entertainment is recoverable. The definition of business entertainment is broadly interpreted to mean hospitality of any kind which therefore includes the following example situations:

• travel expenses incurred by non employees but reimbursed by the business, such as self employed workers and consultants
• hospitality elements of trade shows and public relations events.

Business gifts

A VAT supply takes place whenever goods change hands, so in theory any goods given away result in an amount of VAT due. The rule on business gifts is that no output tax will be due, provided that the VAT exclusive cost of the gifts made does not exceed £50 within any 12 month period to the same person.

Where the limit is exceeded, output tax is due on the full amount. If a trader is giving away bought-in goods, HMRC will usually accept that he can disallow the tax when he buys the goods, which may be more convenient than having to pay output tax every time he gives one away.

Routine commercial transactions which might be affected include such things as long service awards, Christmas gifts and prizes or incentives for sales staff.

Cars and motoring expenses

Input tax errors often occur in relation to the purchase or lease of cars and to motoring expenses in general. Some key issues are:

• Input VAT is generally not recoverable on the purchase of a motor car because it is not usually exclusively for business use. This prohibition does not apply to commercial vehicles and vans, provided there is some business use.
• Where a car is leased rather than purchased, 50% of the VAT on the leasing charge is not claimed for the same reason.
• Where a business supplies fuel or mileage allowances for cars, adjustments need to be made to ensure that only the business element of VAT is recovered. There are a number of different methods which can be used, so do get in touch if this is relevant to you.

Output VAT issues

Bad debts

Selling on credit in the current economic climate may carry increased risk. Even where credit control procedures are strong there will inevitably be bad debts. As a supplier, output VAT must normally be accounted for when the sale is initially made, even if the debt is never paid, so there is a risk of being doubly out of pocket.

VAT regulations do not permit the issue of a credit note to cancel output tax simply because the customer will not pay! Instead, where a customer does not pay, a claim to recover the VAT on the sale as bad debt relief can be made six months after the due date for payment of the invoice.

Example: A trader supplies and invoices goods on 19 October 2010 for payment by 18 November 2010 (ie a normal 30 day credit period). The earliest opportunity for relief if the debt is not settled would be 18 May 2011. The relief would be included in the return into which this date fell, depending on the return cycle of the business.

The taxpayer can only claim relief for the output tax originally charged and paid over to HMRC, no matter whether the rate of VAT has subsequently changed. In the above example the standard VAT rate charged would have been 17.5% (not the current 20%) so a claim can be made for only 17.5%. The claim is entered as additional input VAT - treating the uncollected VAT as an additional business expense - rather than by reducing output VAT on sales.

The customer

A customer is automatically required to repay any input VAT claimed on a debt remaining unpaid six months after the date of the supply (or the date on which payment is due if later). Mistakes in this area are so common that visiting HMRC officers have developed a programme enabling them to review Sage accounting packages and to list purchase ledger balances over 6 months old for disallowance.

Preventing the problem?

Small businesses may be able to register under the Cash Accounting Scheme, which means you will only have to account for VAT when payment is actually received. The scheme is considered in more detail later in this briefing.

Special schemes for the smaller business

Several special schemes relate to smaller businesses. These are mainly aimed at reducing the compliance burden.

The Flat Rate Scheme (FRS). FRS is an attempt to simplify VAT accounting for the small or growing business. This optional scheme provides currently registered traders with an alternative mechanism for accounting for VAT, and offers an additional incentive for new registrations. The scheme enables eligible businesses to calculate their VAT payment as a flat percentage of total turnover. The percentage to be used depends on the type of business activity carried on. If the business is newly registered for VAT and also decides to operate this scheme then a further 1% flat rate reduction applies in that first year of registration. The scheme is generally open to small businesses whose annual taxable turnover excluding VAT does not exceed £150,000. Traders must now leave the scheme when their taxable turnover (including VAT) exceeds £230,000. This calculation must be made annually on the anniversary of the trader joining the scheme. 

Annual Accounting Scheme. The Annual Accounting Scheme is also generally aimed at the smaller business. It can either be combined with FRS (described above) or used by a business which uses standard VAT accounting. The scheme allows the business to complete just one VAT return each year, instead of the usual four. However, it retains a smooth cash flow position as instalment payments of the expected VAT liability are made on account, so that the business is not faced with a large VAT bill at the end of the year. A choice of three (quarterly) or nine (monthly) instalments can be made towards the end of year VAT liability. These must be paid by direct debit, standing order or other electronic means. A business with a taxable turnover up to £1.35 million can apply for entry into this scheme.

Cash Accounting Scheme

Another popular small business scheme is the Cash Accounting Scheme. Under standard VAT accounting, VAT is payable on sales whether or not the customer has paid and can lead to a need to claim bad debt relief (as detailed earlier). Under this scheme VAT does not need to be paid over until the customer has paid. If the customer does not pay then the VAT is not payable. This clearly has cash flow benefits for traders which sell on credit. A business can enter this scheme provided the estimated VAT taxable turnover for the next VAT year is not more than £1.35 million. It can continue to use the scheme until the VAT taxable turnover exceeds £1.6 million. Where your business is registered under the Cash Accounting Scheme, do remember that this also means that VAT cannot be claimed on purchases and other inputs until you have actually made the payment, rather than the standard method of accounting for the reclaim when you receive the invoice. 

We can advise you if this scheme would be suitable for your business.

HM Revenue and Customs (HMRC) has announced plans to make online value-added tax (VAT) filing, payment and registration mandatory in the coming year.

From April, 2010, online filing of VAT returns and electronic payment became compulsory for all newly established businesses (regardless of turnover) and all existing businesses with a turnover of over £100,000. The decision to mandate the remaining businesses to do so was confirmed in the March Budget. In addition, in 2012, HMRC intends to introduce an enhanced and streamlined online service for VAT registration and deregistration.

"VAT: consultation on the next steps for moving VAT online" opened on August 8. It includes proposed legislation and seeks views on how to ensure and enhance assistance for those having difficulty moving online. Under the current rules, businesses with a turnover of less than GBP100,000 can still choose how to file their VAT returns. Under the plans, it will become a legal requirement to file these online, irrespective of the size of the business in question. According to the consultation document, online filing provides speed, security and convenience for customers and efficiency benefits for HMRC.

The consultation also states that HMRC's experience so far shows that those early mandated customers have demonstrated good compliance, with few practical problems encountered and a faster than expected take-up noted. In addition, of the 750,000 existing businesses left out of the initial phase in the scheme, 400,000 have thus far chosen to move to online filing.

“Once in force, the new rules will require online filing for all accounting periods starting on or after April 1, 2012, with any VAT due to be paid electronically from the same date. HMRC will write to the businesses affected in February next year, explaining the changes and their impact. In addition, HMRC is to offer a period of grace to those experiencing difficulty in moving online, and will not penalise those who fail to do so within the first year”.

An online registration, variation and deregistration service is also intended to become available from October, 2012. This, HMRC says, will make matters easier on both sides, and drive down costs.

If you need more information or would like to talk the implications through for your business please contact us.

The First Tier Tribunal has heard the case of Russell Francis Interiors relating to a penalty imposed regarding the failure to take reasonable care in completing A VAT return.

Russell Francis Interiors was in the furniture business and held a small property portfolio, which the taxpayer had opted to tax. In May 2009 the owner exchanged contracts for the purchase of a commercial warehouse and mistakenly believed that the date of exchange of contracts was the tax point for the transaction and incorrectly claimed the VAT Input Tax in the quarter 06/09. For Capital Gains Tax purpses the date of sale is indeed the date of the contract, provided that it is unconditional. For VAT purposes though the tax point is normally the date of delivery (or payment if earlier) and this means that the relevant date is the date of completion.

Consequently, even though there was no loss of tax to H M Revenue and Customs, VAT was recovered three months earlier that it should have been. HMRC checked the return and in line with its new policy of imposing swinging penalties to support the beleagured Treasury charged a penalty of 15% of the tax claimed.

The taxpayer appealed, and the Tribunal decided that although the transaction was one off, unusually large, with no loss of tax, decided a penalty still chargeable and determined that a penalty of 7 ½ % of the tax was due.

More care than ever is needed in filing tax returns with HMRC if you don't want to be their next victim.