VAT - How to Survive the Enforcement Powers

Although some of the penalties for VAT infringements have been less severe in recent years, there is still an alarming array of enforcement powers to trap the unwary. By being aware of the problem areas and planning carefully, it should be possible to avoid becoming an unwitting victim of the system.

Late registration

You must notify HM Revenue & Customs (HMRC) if your turnover exceeds £81,000 in twelve months, or if you believe it will exceed £81,000 in the next thirty days.

The penalty for failing to notify liability falls within the new single penalty system if the effective date of registration is after 31 March 2009 (see our separate title "Take care to avoid a penalty"). There is no penalty if the taxpayer has a reasonable excuse for not registering at the correct time.

After registration

Every VAT registered business needs to ensure that it is organised to deal with VAT correctly and on time:

Default surcharge

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. 

A cheque must be correct in all respects and not post-dated, otherwise payment will not have been made.

Consequence of default

You receive a warning after the first default - the Surcharge Liability Notice (SLN). Do not ignore this notice. If you fail to pay the VAT due on the due date within the next five quarters, the surcharge will be 2% of the outstanding tax. The surcharge increases to 5% for the next default, and then by 5% increments to a maximum of 15%. Lower rate (2% and 5%) surcharge assessments will not be issued for less than £400. At rates of 10% and 15% the surcharge liability becomes subject to a minimum charge of £30.

Each default, whether it is late submission of the return or late payment, extends the surcharge liability period, but only late payment incurs a surcharge.

Special arrangements for small businesses

Businesses with qualifying turnover up to £150,000 will be sent a letter offering help and support following the first default rather than a SLN. This arrangement is intended to allow extra time to sort out any short-term difficulties before formally entering the default surcharge system. Any further default within twelve months will result in the issue of a SLN.

Errors on returns and claims

Incorrect returns incur a penalty under the new penalty regime.

Retention of records

The period for retaining records is six years. There is a fixed penalty of £500 for breaching this requirement.

Default interest

Interest on tax will arise in certain circumstances, including cases where:

Where an assessment covers a period exceeding three months, HMRC is required to break it down into return periods. This is necessary to establish the period for which interest is to be charged. Normally, interest accrues from the due date for submission of the return for the period concerned. However, the maximum period is three years, although interest will continue to run on assessments remaining unpaid after thirty days from the date of issue.

The rate of interest is set by the Treasury and is broadly in line with commercial rates of interest.

Appeals

Appeals against penalties may be made to the independent tribunal. The tribunal now has powers of mitigation in appropriate circumstances. Where the appeal is against the imposition of interest, penalties, or surcharge, the tax must be paid before an appeal can be heard.

The tribunal is given the authority to increase assessments that are established as being for amounts less than they should have been.

A formal procedure is now established for appeals to be settled by agreement. This agreement must be in writing, and there is a thirty-day cooling off period during which the taxpayer may cancel the agreement.

Access to information

HMRC has extensive powers to obtain information. It can enter premises and gain access to computerised systems and remove documents.

A walking possession agreement can arise where distress is levied against a person’s goods.

The sting in the tail

None of the above penalties or interest is allowable as a deduction when computing income for corporation or income tax purposes.

Action points

If in doubt, contact us. It is important that you seek professional advice as early as possible. We can help you!

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