Steve Allen

Schedule for Introduction

One of the most far reaching changes will be as a result of Lord Carter’s review of the Governments online services.  He has recommended that all filing should be done online, including VAT returns.  The mandatory filing and paying of VAT returns will be phased in from 2008. The schedule for introduction will be:

• Businesses with a turnover greater than £5.6 million and newly registered businesses will have to file electronically for VAT periods starting after 31 March 2008
• Businesses with a turnover greater that £100,000 with VAT periods starting ‘at the earliest’ after 31 March 2010
• The Government will review the position of businesses with a turnover less than £100,000 in the run up to 2012
• This will obviously impact small businesses that do not use computers, or individuals that are not happy using new technology.

Penalties

To accompany the requirement to submit all returns on line, HMRC will introduce a new range of penalties. The scales of penalties proposed are:

• Large (annual turnover > £22.8 million) £300
• Medium (annual turnover > £5.6 million) £200
• Small (annual turnover ? £5.6 million) £100

The definition will be based on turnover for the previous year.  The definition for new traders will be based on the estimated turnover shown on their registration form.  The turnover bands will be based on Companies Act criteria for defining business size. 

VAT Payments

HMRC also intend to discourage payment by cheque, although they do not intend to introduce a penalty regime for those that continue using cheque payments.  The proposal is that the payments received by cheque will only be effective from the date the funds are cleared into HMRC’s account.  This will give a cashflow disadvantage to businesses paying by cheque, as they will have to send their returns in earlier and make sure that the cheque has cleared by the end of the month, not just that the return has to be there by the end of the month. 

During the transition to mandatory online filing, HMRC say they will put in place a programme to help businesses adjust to the new system, particularly, they say, those who do not have access to a computer.  Presumably, they do not intend to give them free computers!  HMRC say that the new penalty regime is intended to send a signal to businesses that the Government is serious about expecting businesses to move to online filing, and that, ultimately, businesses that don’t comply without good reason will be penalised. 

HMRC are also considering a transitional period following the introduction of Lord Carter’s recommendations, possibly six months, during which no penalties will be imposed. During this period, HMRC will issue warning letters to those that file paper returns.  HMRC will also allow a defence of ‘reasonable excuse’ for failure to file online, but only if its software breaks down, and a business cannot submit its return on time. 

However, if a business does have a problem with its own software, or its service provider breaks down, it could still be liable to a penalty for late submission of its return.  HMRC have been asked whether businesses could submit a paper return if the computer systems break down, to ensure that the returns arrive on time, and, therein, avoid a penalty for late returns.  Helpfully, they have responded that electronic filing will be mandatory, so they propose that any paper returns that are submitted will generate a penalty under the new regime for failure to submit returns electronically.  No doubt, this will result in a number of Tribunal cases where disgruntled taxpayers try to show that they have a reasonable excuse for the defaults.

Reasonable excuse

In the event of a default surcharge arising, a business has the right to have it removed if he can show that he has a ‘reasonable excuse’.  It seems likely that there will be a lot of reasonable excuse cases before the VAT Tribunals following these changes, as businesses try and show that late returns were caused as a result of unforeseen computer breakdowns that were outside their control.  I would expect the Tribunals to take a reasonable view in these cases, particularly if a business can show that it has taken all reasonable steps to submit online within the prescribed time limits.

HMRC has undertaken a consultation to standardise penalties across the Department. Following the consultation, HMRC has produced a document confirming its proposal for a unified penalty regime across all the taxes administered by them, and a new approach involving a level of penalty that reflects the behaviour of the taxpayer.

The new penalty regime will cover incorrect returns for income tax, corporation tax, PAYE, NIC, and VAT, and will take effect in April 2009. 

The legislation is included in the Finance Act 2007, and will provide for a single new penalty regime for incorrect returns. The penalty is based on the amount of tax that was understated or would have been lost, the nature and behavior giving rise to the understatement, and also the extent of disclosure by the taxpayer.

The new regime will replace current rules and there will be:

1. No penalty for mistakes despite taking reasonable care;

2. A penalty of 30% of the tax lost due to failure to take reasonable care

3. 70% of the tax lost due to deliberate action

4. 100% of the tax lost due to deliberate action with concealment

Each penalty can be substantially reduced where the taxpayer makes a disclosure, more so where this is unprompted, and there will be the right of appeal against penalty decisions. A new concept of ‘suspended’ penalties will also be introduced.  HMRC will be able to impose a penalty for failure to take reasonable care, but not enforce it for up to two years. If the taxpayer makes no further errors, the penalty will lapse.  This will, no doubt, encourage the business to be compliant.

The first penalties for all taxes covered by the new regime will be chargeable for return periods starting on or after 1 April 2008, where the return is filed on or after 1 April 2009. Unless both conditions apply, returns will be subject to current rules. 

On the plus side, if the taxpayer can satisfy HMRC that they took reasonable care to avoid an inaccuracy, but despite this, an agent (e.g. accountant or bookkeeper) failed to take due care, no penalty will be due.  The current position is that reliance on others is not considered to be a reasonable excuse.

Taxpayers may find it easier to understand a single penalty regime applicable across the different taxes.

Other areas of HMRC’s online VAT services are also coming under scrutiny, following the introduction of the new VAT 1 registration form.

VAT registration

The good news on the registration front is that HMRC has changed its policy on the registering of intending traders, and started to review and improve the systems for processing the VAT registration forms.  The new VAT 1 has reduced the amount of information that is required, and is easier to complete, so there are fewer queries being raised.  As a result of this, the processing of VAT 1 registration forms has speeded up considerably.

Following a short period where processing times started to fall, the registration units were reorganised and the numbers of staff reduced.  Not surprisingly, processing times have since risen again – who could have predicted that!

Moreover, all is not well with the online VAT registration system.  Having introduced the new paper form of the VAT 1, HMRC tried to transfer it to the online service, but found that the software could not be changed to accept the new registration form.  Because of the overhaul of the whole system, it cannot be amended to accept the new form until at least 2010.  HMRC is now seriously considering withdrawing the online registration service, or having the new VAT 1 online in a format (probably Adobe) which can then be e-mailed to HMRC and processed manually.  This completely removes the advantages of the online completion, automatic processing, and verification of large sections of the form, and makes one question how a new form could have been introduced without anybody having checked with IT that it was compatible with existing software.

Article Added Sunday, 30 September 2007 | 2473 Hits

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