As the economy picks up and businesses of all sizes start to expand, it is a good time to think about the basics of VAT housekeeping to ensure that unnecessary costs are avoided and that the accounting function is geared up to cope.
Businesses both large and small can benefit from casting a critical eye over their VAT accounting procedures to ensure they are fit for purpose. All of the notes below reflect situations we have been asked to assist clients with in recent months.
VAT surcharge for late payment
We are regularly asked if we can assist companies who have incurred penalties by failing to pay their VAT return on time.
Reasons for late payment vary from not having cash available, the relevant person not understanding the importance of paying on time, or most frustratingly ‘I was really busy and forgot’. Unfortunately HMRC are very unlikely to accept any of these as a reasonable excuse and the surcharge of a percentage of unpaid VAT may have to be paid.
Not paying your VAT on time when you are already on a Default Surcharge Liability notice will cost you money. It makes sense to dedicate any cash available to paying that liability. If this is not possible, pay as much as possible on time and contact HMRC before the due date to agree a time to pay arrangement for the remaining balance.
As businesses expand, their accounts team may be asked to process higher volumes and values, and may not have the experience or capacity to do that effectively. A review of VAT return preparation processes and safeguards could highlight where weaknesses exist and can be addressed before problems arise. A second set of eyes review, recurring reminders, writing down processes and having a back up plan for staff absences, are simple ways to avoid problems.
Penalties for errors
Expanding activities into new markets and service lines can lead to misunderstanding of the VAT reporting required. Businesses are increasingly exploiting overseas markets, but may not have the experience required to avoid errors in VAT accounting.
When we become aware of clients expanding their activities, it is a good trigger point to offer help in setting up the systems necessary to manage their VAT risk.
If an error is made and a penalty imposed, it is often worthwhile appealing those penalties. We have a good success rate in helping clients to avoid penalties when making error declarations, and in getting them removed after they are imposed.
Bad debt relief
An expanding business which is having to closely manage its cash flow, may have customers who are in the same situation and stretching payment terms. Businesses should have a system which automatically identifies those debts which are more than six months beyond their payment due date. The VAT element of the unpaid amount can then be claimed back and only has to be repaid to HMRC when the debt is actually paid. Too often this is left as a once a year exercise wasting earlier relief.
Smaller businesses can use Cash Accounting to get automatic bad debt relief, without waiting six months, if their turnover is below £1.35 million.
New activities set up in a separate company to ring fence risk could lead to multiple VAT registrations. A holding company which has no taxable business activity of its own is not entitled to be registered or recover VAT on compliance costs. By forming a VAT group, you can simplify VAT reporting and can also enable the parent company costs to be recovered, subject to the usual recovery rules.
We have recently seen HMRC attack VAT recovery by parent companies with trading subsidiaries which are not VAT grouped, but the parent is registered on the basis of making management charges. Such an arrangement should be documented by board minutes and invoices raised regularly to protect VAT recovery by both companies. We recommend that VAT advice is taken in these circumstances.
New businesses setting up, or existing businesses with low turnover, do not have to register for VAT until their turnover in a twelve month period exceeds £81,000. Sadly the threshold is often missed as the owner will not think about it until they send us their year end accounting information. They can then be subject to late registration penalties and be liable to the undeclared VAT from the date they should have registered. We can help them to avoid the cost and inevitable worry that this will cause by advising them to keep a rolling monthly check on turnover.
Small traders with turnover below the threshold should consider whether it would be advantageous to register voluntarily. If all of their customers are businesses who would be able to recover VAT charged, they could benefit from being able to claim back VAT on their costs.
The flat rate scheme is designed to simplify the VAT reporting required for businesses with turnover less than £150,000 per annum. VAT is paid to HMRC based on a set percentage of turnover. As the percentage is designed to be an average for businesses in any particular sector, it is worth running a check to ensure they will not be worse off by using the scheme.
All of the above are designed to be simple and cost effective good housekeeping points, to enable your clients to avoid incurring unnecessary VAT costs.
Please contact your usual Menzies VAT team representative or e-mail email@example.com