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Andrew Needham, Director of VAT Solutions (UK) Ltd, reports on the future mandatory online filing of VAT returns, and HMRC changes in registering new businesses for VAT.

Get Carter!

Lord Carter has undertaken a review of the Governments online services – “so what?” you may well ask!  Well, he has recommended that all filing should be done online, including VAT returns, and so a mandatory filing and paying of VAT returns will now 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 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.

More interesting is the fact that HMRC will allow late returns without imposing a penalty (i.e. Default Surcharge) if their software breaks down, and you cannot submit your return on time.  However, if you have a problem with your software, or your service provider breaks down, you could still be liable to a surcharge for late submission of your return.  We have asked HMRC if a business could submit a paper return when its computer systems break down, to ensure the return arrives on time and thereby avoid a surcharge.  Helpfully, we have been told that electronic filing will be mandatory, so they will not accept paper or faxed returns, and any that are submitted that way will be ignored and a default surcharge levied - nice!

The Default Surcharge regime works like this; a first late return and you get a warning letter, another late return within 12 months, and a penalty of 2% of the tax due is imposed.  This grows with each subsequent fault within a 12 month period to 5%, 10%, and finally 15%.  Only when you submit 12 months’ of returns on time (and with full payment if due), can you get back to zero.

In the event of a default surcharge arising, a business has the right to have it removed if it can show that it has a ‘reasonable excuse’.  It seems likely there will be a lot of reasonable excuse cases before the VAT Tribunals following these changes, as businesses inevitably try to show that the late returns were as a result of unforeseen computer breakdowns, and so outside their control.  We would expect the Tribunals to take a reasonable view in these cases, particularly if a business has tried to submit a paper return and HMRC have refused it!

HMRC speeds up registration of new businesses

HMRC have changed their policy on the registering of ‘intending traders’ (those that have not started trading yet, but wish to register for VAT in advance of trading to get the VAT back on setup costs etc.), and started to review and improve their systems for processing the VAT registration forms.  HMRC have reduced the amount of information that they require to prove that a business intends to trade.  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 were taking an average of 8 weeks. Sources within HMRC have confirmed that the previous lengthy processing times were as a result of poor internal procedures rather than a lack of resources (how reassuring!).

On 1 December 2006, a new VAT 1 was introduced, and we had the chance to review it well in advance of its introduction.  The form is shorter, and more logically laid out than the previous one, which should reduce the incidence of errors in completing the form.  HMRC are hopeful that this should further improve processing times.  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.