Are you walking a VAT tightrope?

Walking a VAT tightrope



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How to avoid the new harsher penalty regime

VAT is one of the most important sources of revenue for the Government, representing 17.7% of all receipts and raising over £156 billion – more than the entire annual NHS budget. So it should come as no surprise that HMRC take an increasingly severe view of non-compliance.

For this reason, the methods they use to detect infractions are becoming ever more hi-tech – ranging from real-time reporting to advanced machine learning – and those caught failing to comply with VAT face severe consequences – both in the short and long term.

These consequences go way beyond the obvious penalties and interest charges nowadays – companies that don’t meet the basic VAT requirements risk grave damage to their corporate reputation and restrictions on doing business. And in from this month (January 2023), a new, even more complex penalty regime comes into force.

The new penalty regime

The new penalty regime was deferred to 1 January 2023 to give taxpayers time to migrate to the new MTD (Making Tax Digital) regime (and for HMRC itself to get its IT in order).

The new system treats late filing and late payment differently.

Late filing penalties

HMRC will operate a “totting-up” points system (which may be familiar to motorists) for late filing of VAT returns. Businesses will accrue one penalty point each time they’re late submitting their VAT return, and will be penalised when they breach the limit.

The limit varies depending on how often VAT returns are required to be submitted, and are set as follows:

Monthly Submission – 5 points;

Quarterly Submission – 4 points;

Annual Submission – 2 points.

So, to explain this in real terms – if you’re required to submit quarterly and you submit late, you will receive a point the first three times you’re late. The fourth time, you’ll recieve a fourth penalty point PLUS an automatic £200 fine. Once at the points limit, you won’t get any more penalty points, but every time you’re late, you’ll have to pay another £200 financial penalty.

If you file monthly, HMRC will notify you of any point levied within 2 weeks. They’ll inform you within 11 if you file quarterly and 48 weeks if you file annually.

If you don’t reach the limit, your points will expire after two years, starting from the month after the one in which your late filing occurred.

If the limit is reached, your points won’t expire until you meet both of the following conditions:

  1. You complete a specific period of compliance without a late submission – this is set at:
  • 6 months for monthly submissions
  • 12 months for quarterly submissions
  • 24 months for annual submissions
  1. You’ve correctly filed your VAT returns for a period of 24 months, whether they were submitted late or not.

Late payment penalties

Under the new regime, there is a 15-day initial grace period where you won’t be penalised for late payment if you pay in full within 15 days after the submission deadline.

Once the grace period ends, you’ll be liable for a first penalty of 2% of the total tax outstanding.

If the tax is still unpaid after 30 days, the penalty increases to 2% of the tax outstanding at day 15 plus 2% of the tax outstanding at day 30 (in most cases, this will total 4% of the late tax).

After Day 31, any tax still unpaid will trigger a further penalty of 4% per year, accrued daily.

Any history of previous late payment will not be taken into consideration when charging these late payment penalties. However, if you have a reasonable excuse for a late payment and explain it to HMRC before the late penalties are charged, they will consider it and may waive the penalties.

If you’re in difficulties, you will be able to request Time-to-Pay (TTP) arrangements, which will stop the charges accruing any further from the date you contact HMRC to agree a payment schedule. However, they will not agree a TTP arrangement if you request it after day 30 and there is still tax unpaid if at that date – the additional penalty will start accruing from Day 31.

Regardless of any late payment penalties charged, a late payment simple interest at a rate of 2.5% plus the Bank of England base rate will be charged on any tax outstanding after the due date.

Further risks of VAT non-compliance

It’s not just financial penalties you have to worry about if you don’t comply with the basic VAT requirements – it can also cause serious risks to your business, including:

VAT inspections and extended audits 

A late or incorrect return can trigger an intrusive, invasive and exhaustive HMRC VAT inspection. Trust us – this is the last thing any company wants. A VAT inspection is costly both financially and in terms of input from key staff, and worse – they often reveal further non compliance, putting you in line for even more penalties.

Reputational damage

If it gets out that your business is under an HMRC investigation – or has been hit with penalties, it can undermine confidence of suppliers, clients and shareholders. How would they find out, you ask? HMRC inspectors often contact major clients or suppliers and ask for a record of their transactions with the company – an excruciating and damaging situation to be avoided.

Being barred from trading on platforms

As HMRC enthusiastically embraces 21st century technology, e-commerce has been absorbed into VAT rules. One such visionary step is to make online platforms like Amazon and eBay responsible for collecting VAT. If you don’t have a valid VAT number the platform could pull down your virtual shutters. 

Being banned from trading

If it HMRC decides you’ve deliberately failed to pay VAT, they may completely ban you from trading for a specified period of time.

Criminal charges

If you’re suspected of VAT fraud, the penalties are even more severe, extending to imprisonment and/or unlimited fines.

Other tax liabilities

If a VAT investigation unearths invoices or transactions they deem suspect, this could lead them to investigate other irregularities – e.g. if your VAT return is wrong, they may question whether your corporate income tax returns are accurate.

What if you make a mistake?

Unfortunately, HMRC have very little patience for mistakes. Any error will leave you potentially liable for a penalty which starts at around 30% of the tax error – even if you find the mistake notify HMRC yourself – unless you can prove that your business has exercised ‘reasonable care’, in which case they may halve, or even waive the penalty.

But don’t be fooled into thinking this ‘reasonable care’ is a route to an easy let-off. So it’s crucial to have robust, in-depth evidence ready that you’ve taken reasonable care if you plan to challenge a penalty assessment with HMRC.

Want to reduce your risk? Try our VAT Risk Evaluation Tool

Full disclosure – there are other VAT Compliance Tools on the market, but most don’t do much more than just ask you a series of questions about what you do – which is not exactly going to make you bulletproof if you ever have to prove ‘reasonable care’.

Our tool, on the other hand, focuses on your approach to managing VAT risk. It’s a meticulous, in-depth investigation into all areas of your VAT compliance management. It goes into the kind of areas where adopting the right approach is critical to meeting your VAT reporting obligations – areas like how robust are your procedures to ensure that the employee who completes the return is supported by the business and what documented procedures you have in place for VAT return collation.

At the end of the process, it leaves you with a bespoke report, specific to your activities, furnished with detailed insights into all areas of your VAT return. The report will provide a rating of how well your processes are managing VAT risk, highlighting good practices where identified and suggesting where improvements can be made. Crucially, it also arms you with documentary evidence of your ‘reasonable care’.

So why expose your company to VAT risk for a moment longer than you have to? Complete the contact form below to speak with our specialist VAT advisors about the VAT Risk Evaluation Tool.

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