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the information HMRC holds for businesses which do not complete VAT returns will, in many cases, be up to a year out of date.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.