THE VAT MAN COMETH

HMRC has written to businesses which it believes are trading above the VAT threshold, but who are not currently VAT registered. Thomas Peterson of Accounting Web explains what to do when such a letter arrives. 

23rd Mar 2021

Tell the accountant

HMRC has not sent a copy of the letter to the trader’s tax agent and so accountants will not be aware their client may have received the VAT related letter. It is important that the letter is copied to  the accountant as soon as possible, as the adviser can assist with mitigating penalties should the registration deadline have been missed.

What are the rules?

A business is required to register for VAT once its historic taxable turnover for the previous 12 months exceeds £85,000, or if it expects its future taxable turnover in the next 30 days alone will exceed £85,000. Exempt sales, such as land or insurance, do not count towards these thresholds. However, zero-rated sales, such as books and children’s clothing, and reduced-rated sales, such as alterations to houses, do count. 

For the historic test the business is required to notify HMRC within 30 days of the month’s end when it exceeded the threshold and becomes registered from the first day of the second month. For the future test it must notify by the end of the 30 days after the future expectation arose and becomes registered from the start of the 30th day.

Late registration penalty

HMRC may charge a penalty where a business misses the VAT registration deadline. These penalties are based on a percentage of the net VAT payable between the date the business should have registered and the date it actually did register, ranging from 5% to 15% depending on how late the registration is.

Information delay

Due to the nature of the self-assessment system, the information HMRC holds for businesses which do not complete VAT returns will, in many cases, be up to a year out of date. For self-employed traders this will be the profits up to the 5 April 2020, and for companies reported profits potentially as far back as 29 February 2020. 

As this is roughly the date when the Covid-19 restrictions began to have an impact on many businesses, it is entirely possible that the health of the business, including its turnover levels, will have fallen since the last reported period end, making HMRC’s extrapolated estimates of turnover incorrect.

What to do

Any businesses that have received such a letter should review their rolling 12-month turnover figures to ensure at no point did they breach the £85,000 threshold. This review should extend as far back as possible to ensure a reporting requirement has never arisen. All businesses, including those who have not received a HMRC letter, should be in the habit of reviewing their rolling turnover at the end of each month, especially where it has previously been close to the VAT registration threshold.

If the review reveals no requirement to register, either current or historic, then the business should reply to the HMRC letter and confirm this. This will prevent HMRC following up with further letters unnecessarily.

How to register

If VAT registration is required, regardless of whether the applicable deadline has been missed or not, the business should immediately register for VAT online, and notify HMRC via the address on the letter that they have done so. 

Where the business should have been VAT registered with effect from an earlier date, VAT will become due on any sales made since that date, but it also becomes entitled to recover any VAT suffered on business purchases. The business can also generally recover VAT paid in the previous four years for physical items still held at registration, or within the last six months for services purchased prior to the date of registration.

Depending on the wording of the contracts, the business may be able to issue additional invoices to affected customers for any VAT that should have been charged historically. Where the customer is VAT registered this is unlikely to represent a real cost to them, as they will recover any VAT paid, however they may require additional time to make the payment to minimise the impact on their cashflow.

Exemption required

If the outcome of the review is that the threshold was exceeded in a previous 12 month period, but that turnover subsequently fell such that the 12 month rolling turnover ever since has been below the threshold (and is expected to remain below the threshold going forwards), it is important that the business still completes the registration forms but ticks the box to request exception from registration.

If HMRC agrees that the exception applies, the business will not be required to register, but it must continue to review its turnover as usual.

An exemption can also be claimed if the business has exceeded the threshold (and has not dropped back below it) but only due to a high level of zero-rated sales. However, in that instance the business may wish to register regardless, as it is likely to receive refunds of VAT each quarter.

Delays at HMRC

HMRC is currently taking considerably longer to deal with forms and queries and it has steadily built up a backlog of forms to process, and it has apologised for this. If your client has registered for VAT within the last few months but they received a letter regardless, it is likely that HMRC has not processed their application as yet. If this is the case you should note this in your response to the letter.

Newsletter 153

Sunak set out Budget to protect businesses

Chancellor Rishi Sunak set out a Budget to protect businesses through the pandemic, fix the public finances and begin building the future economy.

The Chancellor once again pledged to do ‘whatever it takes’ during the COVID-19 pandemic and confirmed that the furlough scheme would be extended until September 2021 to support jobs through the crisis.

Mr Sunak also confirmed that the Self-Employment Income Support Scheme (SEISS) has also been extended, with two further grants this year. Claimable by the self-employed, including the newly self-employed from 6 April 2019, provided they have filed their 2019/20 tax return for by midnight on
2 March 2021,

The stamp duty nil rate band on residential properties in England up to £500,000 will continue until the end of June. It will taper to £250,000 until the end of September, and then return to the usual level of £125,000 from 1 October 2021.

To support businesses as they re-open following lockdown, £5 billion will be made available in restart grants. Non-essential retail businesses re-opening first will be eligible for up to £6,000 but the leisure and hospitality sectors, which have been worse affected and will re-open later, will be eligible for up to £18,000.

However, the rate of corporation tax will increase to 25% in April 2023 for companies with profits over £250,000, whilst retaining a Small Profits Rate of 19% for companies with profits of £50,000 or less.

The Chancellor also introduced a super-deduction for companies investing in qualifying new plant and machinery. Under this measure a company will be allowed to claim 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances.

He also confirmed the location of the eight Freeports in England. Freeports are special economic zones with favourable tariffs and lower taxes to make it easier and cheaper to do business.

Internet link: GOV.UK speeches

Business groups welcome Budget

Business groups welcomed the Chancellor’s Budget for protecting the economy now and kickstarting recovery from the COVID-19 pandemic.

Tony Danker, Director General of the CBI, said:

‘The Chancellor has gone above and beyond to protect UK businesses and people’s livelihoods through the crisis and get firms’ spending.

‘Thousands of firms will be relieved to receive support to finish the job and get through the coming months. The Budget also has a clear eye to the future; to ensure finances are sustainable, while building confidence and investment in a lasting recovery.’

Meanwhile, the British Chambers of Commerce’s (BCC) Director General, Dr Adam Marshall, commented:

‘The Chancellor has listened and acted on our calls for immediate support to help struggling businesses reach the finish line of this gruelling marathon and to begin their recovery.

‘Extensions to furlough, business rates relief and VAT reductions give firms a fighting chance not only to restart but also to rebuild.’

However, the Federation of Small Businesses (FSB) said that there was little in the Budget to aid job creation or help people return to work. Mike Cherry, National Chairman of the FSB, said: ‘Thousands of small businesses are on the brink of collapse and thousands more are suffering from low confidence as cash reserves dwindle.

‘The continuation of business rates and VAT discounts is critical, and it’s important that those in supply chains benefit from them, not just those that neatly fit the definitions of frontline retail, leisure and hospitality.’

Internet links: CBI press release BCC press release FSB press release

Late payment penalties for Self Assessment waived until 1 April

HMRC has announced that Self Assessment taxpayers will not be charged a 5% late payment penalty if they pay their tax or set up a payment plan by 1 April.

The payment deadline for Self Assessment is 31 January and interest is charged from 1 February on any amounts outstanding.

Normally, a 5% late payment penalty is also charged on any unpaid tax that is still outstanding on 3 March. But this year, because of the impact of the coronavirus (COVID-19) pandemic, HMRC is giving taxpayers more time to pay or set up a payment plan.

Taxpayers can pay their tax bill or set up a monthly payment plan online and are required to do this by midnight on 1 April to prevent being charged a late payment penalty. The online Time to Pay facility allows taxpayers to spread the cost of their Self Assessment tax bill into monthly instalments until
January 2022.

Jim Harra, HMRC’s Chief Executive, said:

‘Anyone worried about paying their tax can set up a payment plan to spread the cost into monthly instalments. Support is available at GOV.UK to help anyone struggling to meet their obligations.’

Internet link: HMRC press release

Online service opens for VAT deferral scheme

HMRC has announced that businesses that deferred VAT payments last year can now join the new online VAT Deferral New Payment Scheme to pay it in smaller monthly instalments.

To take advantage of the new payment scheme businesses will need to have deferred VAT payments between March and June 2020, under the VAT Payment Deferral Scheme. They will now be given the option to pay their deferred VAT in equal consecutive monthly instalments from March 2021.

Businesses will need to opt-in to the VAT Deferral New Payment Scheme. They can do this via the online service that opened on 23 February and closes on 21 June 2021.

Jesse Norman, Financial Secretary to the Treasury, said:

‘The Government has provided a package of support worth over £280bn during the pandemic to help protect millions of jobs and businesses.

‘This now includes the VAT Deferral New Payment Scheme, which will help provide businesses with the breathing space they may need to manage their cashflows in the weeks and months ahead.’

Internet links: GOV.UK guidance GOV.UK press release

HMRC clarifies off-payroll rules

HMRC has published a briefing on its approach to the changes to off-payroll working rules, commonly known as IR35, which will be introduced on 6 April 2021.

Reiterating its advice from last year, HMRC has confirmed that it will not issue penalties for inaccuracies in the first 12 months of the regime, unless there is evidence of deliberate non-compliance.

HMRC also confirmed that it will not use information it receives under the expanded regime to open new compliance enquiries into returns for tax years before 2021/22, unless there is reason to suspect fraud or criminal behaviour.

The new tax rules will see the extension to medium and large organisations in the private sector. These reforms will shift the responsibility for assessing employment status to medium and large organisations engaging individuals via a personal services company.

Internet link: GOV.UK

Domestic VAT reverse charge comes into effect on
1 March

The twice-delayed introduction of the domestic VAT reverse charge for construction services came into effect on
1 March 2021.

The change was originally scheduled to come into effect from
1 October 2019 but was deferred for 12 months after industry bodies highlighted concerns about the lack of preparation and the impact on businesses.

It was put back another five months due to the impact of the coronavirus (COVID-19) pandemic on the sector. The change applied from 1 March 2021 and overhauled the way VAT is payable on building and construction invoices as part of a move to reduce fraud in the sector.

From March 2021, the person receiving the supply of services, not the supplier of services, who accounts for the output VAT on those services. The recipient deducts VAT due on the supply as input VAT, subject to normal VAT rules. In most cases, no net tax on the transaction will be payable to HMRC. This new procedure will apply right the way up the CIS supply chain until you reach end users/intermediary suppliers, the supply defaults to normal VAT rules, so long as the end user/intermediary supplier correctly evidences their status.

The Domestic Reverse Charge (DRC) applies to most supplies of building and construction services from 1 March 2021, which are:

• standard or reduced rated supplies
• where both parties are registered for VAT in the UK
• and payments for the supplies are required to be reported via the Construction Industry Scheme.

The DRC does not apply to:

• zero rated supplies
• services supplied to end users or intermediary suppliers, so long as these have provided written confirmation of their status to the supplier
• employment businesses supplying either staff or workers.

Please contact us for advice on the DRC and how it impacts your business.

Internet link: GOV.UK

Borrowers of Bounce Back loans given six more months for repayments

Businesses that took out government-backed Bounce Back loans to get through the coronavirus (COVID-19) pandemic will now have greater flexibility to repay their loans, the government has announced.

The Pay as You Grow repayment flexibilities now include the option to delay all repayments for a further six months. This means businesses can choose to make no payments on their loans until 18 months after they originally took them out.

Pay as You Grow will also enable borrowers to extend the length of their loans from six to ten years, which reduces monthly repayments by almost half.

They can also make interest-only payments for six months to tailor their repayment schedule to suit their individual circumstances.

The Pay as You Grow options will be available to more than 1.4 million businesses which took out a total of nearly £45 billion through the Bounce Back Loan Scheme (BBLS).

The Chancellor of the Exchequer, Rishi Sunak, said:

‘Businesses are continuing to feel the impact of extended disruption from COVID-19, and we’re determined to give them the backing and confidence they need to get through the pandemic.

‘That’s why we’re giving Bounce Back loan borrowers breathing space to get back on their feet, through greater flexibility and time to repay their loans on their terms.’

Internet links: GOV.UK news British Business Bank

Advisory fuel rates for company cars

New company car advisory fuel rates have been published and took effect from 1 March 2021.

The guidance states: ‘You can use the previous rates for up to one month from the date the new rates apply’. The rates only apply to employees using a company car.

The advisory fuel rates for journeys undertaken on or after
1 March 2021 are:

Engine size	Petrol
1400cc or less	10p
1401cc – 2000cc	12p
Over 2000cc	18p
Engine size	LPG
1400cc or less	7p
1401cc – 2000cc	8p
Over 2000cc	12p
Engine size	Diesel
1600cc or less	9p
1601cc – 2000cc	11p
Over 2000cc	12p

HMRC guidance states that the rates only apply when you either:

• reimburse employees for business travel in their company cars
• require employees to repay the cost of fuel used for private travel

You must not use these rates in any other circumstances.

The Advisory Electricity Rate for fully electric cars is 4 pence per mile. Electricity is not a fuel for car fuel benefit purposes.

If you would like to discuss your car policy, please contact us.

Internet link: GOV.UK AFR