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Steve Allen, Director of VAT Solutions (UK) Ltd, comments on the timetable for the mandatory online filing and payment of VAT returns.

Introduction

Following the merger of the Inland Revenue and HM Customs & Excise to form HM Revenue & Customs (‘HMRC’), it quickly became evident that the online services of the two former departments needed reviewing and bringing together under common systems.

It is targeted for the new systems to come online in 2010, although based on pass experience, it seems unlikely that it will come in on time and on budget.  One of the most far reaching changes will be as a result of Lord Carter’s review of the Government’s 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.

Timetable 

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 than £100,000 with VAT periods starting 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.

Clearly, the new electronic regime will impact small businesses that do not use computers, or individuals that are not comfortable with using new technology.

More interesting is the fact that HMRC will allow late returns without imposing a penalty (Default Surcharge), if their software breaks down and a business cannot submit its return on time.  However, if a business has a problem with its 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 if businesses could submit a paper return if the computer systems have broken down to ensure that the returns arrive on time and, therefore, avoid a penalty for late returns.  Helpfully, they have responded that electronic filing will be mandatory, so they propose that any paper returns submitted will generate a penalty under a new regime for ‘failure to submit returns electronically’.

Reasonable excuse

In the event of a default surcharge arising, a business has the right to have it removed if it can show it 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, and outside their control.  We would expect the Tribunal to take a reasonable view in these cases, particularly if a business can show it has taken all reasonable steps to submit online within the prescribed time limits.

Penalties

HMRC is also undertaking a consultation to standardise penalties across the Department. The consultation document confirms a proposal for a unified penalty regime across all the taxes administered by HMRC, and a new approach with the level of penalty reflecting the range of behaviours (i.e. genuine error, carelessness, wilful non-compliance, and wilful non-compliance with attempted concealment).

One of their latest proposals is for a new range of penalties for those who fail to render their returns online.  They would cover NI, Corporation Tax, and VAT returns.  During the transition to mandatory online filing, HMRC say they will put in place a program to help businesses adjust to the new system, particularly those without access to a computer. Presumably, however, this will not involve giving them free computers!  HMRC say the new penalty regime will send a signal to businesses that the Government is serious about expecting businesses to move to online filing, and that, ultimately, businesses that do not comply without good reason will be penalised. 

HMRC are 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.

It is proposed that the level of the penalties will vary between £100 and £300, and will be based on the size of the business measured by turnover. To reflect business size, the proposed model therefore suggests a different flat rate penalty for large, medium, and small businesses.  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.  HMRC also intends to discourage payment by cheque, although they do not intend to introduce a penalty regime for those that do continue to use cheque payments.  These proposals are subject to a short and very limited consultation process.

Registration

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

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 reducing the number of queries raised.  As a result of this, the processing of VAT 1 registration forms has speeded up considerably.

Currently, 60% of applications are processed within 21 days (not working days), and 95% are processed within 31 days.  This is a great improvement on a year ago, when applications for VAT registration where taking an average of 8 weeks.

Sources within HMRC have confirmed that the previous lengthy processing times were due to poor internal procedures rather than a lack of resources.  Even though this is good news for new businesses, it should be remembered that HMRC’s own targets say they should be processing 90% of VAT returns within 15 working days, so they are still some way short of this target.

However, all is not well with the online VAT registration system.  Having introduced the new form, HMRC then tried to transfer it to their online service, only to find 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 some form, probably Adobe, which can then be emailed to HMRC and processed manually.  However, this completely removes the advantages of online completion, automatic processing, and verification of large sections of the form.