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TaxationWeb by Andrew Needham

Andrew Needham explains why cashflow savings in the short term can have unfortunate long term implicationsIf you don’t send in a VAT return, Customs’ computer will ask you to pay what it thinks you owe. If you pay this knowing that it is less than you actually own what will Customs do?

Late returns

Normal situation - If you send in your return late, or not at all, Customs will normally put you into the surcharge penalty regime (warning letter, then surcharges of 2%, 5%,10%, and finally 15%, of the tax due) until you have sent in a full year’s returns on time.

About six weeks after the end of the VAT period, or two weeks after the due date for sending in the return, Customs’ computer will produce a “central assessment” for the VAT it thinks you owe.

What if the “central assessment” is less than the true amount of VAT I owe?

This happens quite often, and many businesses just think, “Oh good, I can pay a smaller amount of VAT”. If you do receive a central assessment that is significantly lower than the amount of VAT due, you have 30 days to inform Customs of the true amount (normally by sending in your VAT return). This means you at least have about 45 days grace to make sure you have the funds before anything nasty can happen. If you don’t tell Customs within 30 days one of two things could happen.

Firstly, Customs could see if the difference is more than either, 30% of the tax due or £1m, which ever is the least. If it fits the bill, you could get a bill for 15% of the VAT due (on top of any surcharges).

The second possibility is much worse. However, it normally only happens to persistent offenders. For example: you have just started a new business and your first VAT return is a repayment, so it goes in on time. The second return shows a small payment to Customs of £300, so that goes in on time as well. The third return comes round and business is doing really well, and you owe Customs £8,500. However, you have not collected in the cash, so are short of money to pay the VAT return. You delay sending in the return, and a couple of weeks later a bill arrives from Customs for £300 (based on your last return). Great, you think, and pay the £300 - hearing no more from Customs. The same thing happens for the next four quarters.

Customs are not stupid, and you go straight to the top of the pile for a visit. When they come out, they calculate how much you owe, and ask why you paid the low assessments when your books clearly showed that you owed much more. You explain that in the early days, you had cashflow problems, and thought it would be alright to pay the assessments.

At this point, you will find yourself in real trouble. Customs will consider that you have committed an offence under s.60 of the VAT Act 1994, and imposes a penalty for dishonest conduct of 100% of the tax due, plus, of course, a bill for the VAT due and the increased surcharges. The amount due is too much to pay, so you decide to liquidate the company. As a Director, you think you are safe from any comeback, but unfortunately, you are wrong again. Because the decision not to inform Customs of the true amount of tax was yours, the dishonest conduct was carried out by you, and Customs have the power to impose the penalty on you personally under Section 61 of the VAT Act 1994. If you can’t pay, Customs will take away your possessions and sell them for what they can get.

Are Customs likely to do this?

Customs have had the power to do this for some time. However, over the last 18 months or so, they have been much more willing to use them, and a number of businesses have suffered as a result. The moral of the story is simple; if your return is late or you can’t pay, negotiate with Customs. If you receive a low assessment, inform them even if you can’t pay, because you may be able to negotiate a time to pay arrangement. Failure to do so could be a disaster!

September 2004

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com


VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc