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VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Ltd, provides a VAT tip on surcharges and points out that changes in the VAT registration process may be on the way.

VAT Tip: Do Me A Favour!

Sending in a VAT return and payment on time can cause problems for businesses with cashflow difficulties. If you send in your returns and payment late, you can find yourself liable to Default Surcharge that can be up to 15 per cent of the net VAT due (i.e. the figure in box 5 of the return). In the recent Tribunal case of Stonewood Electronics Limited (VTD 19,512), the taxpayer won and avoided a penalty. This was a very interesting case, and may be of use for businesses with cashflow problems.

Background

The taxpayer was due to send in his return by 31 December 2004. In this case, the return, together with a cheque for the VAT payable, was dispatched on 27 December 2004 by post. HM Revenue & Customs (HMRC) recorded them as having arrived on 31 December 2004, so at first sight, it would seem that there was no default at all in respect of the period.

A ‘favour’ from HMRC?

However, the return and the cheque were accompanied by a letter from the taxpayer seeking a favour from HMRC.
The letter read as follows:

"At the date of issue of the enclosed cheque we were due and had been promised a payment from a major debtor, but this has been delayed until the end of January.

However we do have other funds, sufficient to meet this arriving in the first two weeks of January and if you are able to withhold deposit of the cheque until say, Monday the 10th January we will be able to meet the demand.

We realise that this is rather unorthodox, but hope to demonstrate our good faith and at the same time avoid penalty for late submission".

Tribunal decision

HMRC agreed not to present the cheque until 10 January, but decided that as the payment was later they would still impose a surcharge of 15%.

The taxpayer appealed and won. The Tribunal decided that as the letter only requested HMRC not to present the cheque until a certain date it was their choice not to do so. As the cheque actually arrived on time then there was no default.

Tip

If you don’t think you will have enough money in your account to pay the VAT until a few days after the return is due, send the return and payment in on time, and include a letter asking HMRC nicely not to present it until you have sufficient funds. That way, you can avoid the surcharge!

Registering for VAT – Changes are on the way!

The process of being registered for VAT by HMRC has become time consuming and protracted. Under the Taxpayer’s Charter, a registration is supposed to be completed within 15 working days, but it is currently taking about 6 weeks. These administrative problems, which have been made all the worse by the additional checks now carried out to identify potential MTIC (‘carousel’) fraud, has resulted in HMRC currently carrying out a thorough review of the registration function.

There are a number of rumours about what this will mean, one of which is that they will introduce a ‘three-month cooling off period’ for registrations. This is obviously of concern to businesses, as they would be trading without a VAT number. Our sources have confirmed that this rumour is based on one person in the HMRC Policy Unit, who thought a three-month cooling off period would enable them to fully vet the application to identify fraudsters (and is a system already used in some other EU member states, most notably Austria).

However, this is only a suggestion. The main thrust of policy is to speed up the registration process through the introduction of a new simplified registration form due out this autumn. The new form will be combined with better training for registration staff and more use of online registrations to reduce the time taken to register a business. The suggested three-month cooling off period is, therefore, likely to be a non-starter.

This is good news for business, as the current delays cause problems through businesses having to issue ‘pro-forma’ invoices while they await their registration number, which then have to be replaced with full VAT invoices once the registration number is received.

July 2006

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

VAT Solutions (UK) Ltd
1 Dundonald Avenue
Stockton Heath
Warrington
WA4 6JT

(T) 01925 212244
(F) 01925 212255
(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 their website: