It has never been more important to keep good VAT records, with HMRC vowing to scrutinise the tax affairs of those who have payments outstanding after 28 February.
When it comes to VAT, this can be an expensive problem, as the business has no right to claim input VAT unless it holds a valid VAT invoice.
HMRC’s VAT Outstanding Return campaign is focused on businesses that have VAT returns outstanding.
Over 50,000 businesses that have failed to submit VAT returns will have their tax affairs closely scrutinised by the Revenue from 28 February if they fail to voluntarily come forward.
According to HMRC, records businesses should keep are:
• VAT records of sales and purchases
• Separate summary of VAT, or VAT account
• No set way of keeping records, but can be adapted from normal business records
HMRC has the discretion to accept alternative evidence in the absence of a valid VAT invoice, but in this case the tribunal would only allow for around £6,000 of the claim.
While the VAT Act 1994 was amended in 2003 to allow HMRC to accept additional information as alternative evidence, what it accepts as this is tightly controlled.
Input tax deduction without a valid VAT invoice – HMRC Statement of Practice
1. Do you have alternative documentary evidence other than an invoice (e.g. supplier statement)?
2. Do you have evidence of receipt of a taxable supply on which VAT has been charged?
3. Do you have evidence of payment?
4. Do you have evidence of how the goods/services have been consumed within your business or their onward supply?
5. How did you know that the supplier existed?
6. How was your relationship with the supplier established? For example:
7. How was contact made?
8. Do you know where the supplier operates from (have you been there)?
9. How do you contact them?
10. How do you know they can supply the goods or services?
11. If goods, how do you know the goods are not stolen?
12. How do you return faulty supplies?
For more information on VAT records and record keeping, see:
In these uncertain times, businesses are at risk from a whole range of factors including changes in consumer demand, increases in operating costs and let’s not forget the banks! Businesses have never needed support as they do now.
That’s why we have decided to start up a monthly coffee morning open to local businesses and individuals in the hope we can offer guidance, financial advice, answer your queries and give you the support you need.
We have a tax specialist that can advise you on Tax planning, personal tax, corporation tax and inheritance tax. We also have a network of professionals we can put you in touch with if you require specialist advice in banking and insurance
Come and visit our friendly team at the The Paine Suite in the Nostell Estate! As well as offering free advice, we also offer free parking, free coffee and not to mention free cake!
A business that joins the scheme avoids having to account internally for VAT on all purchases and supplies, and instead calculates its net liability by applying a flat rate percentage to the tax inclusive turnover. The flat rate percentage depends on the trade sector into which a business falls for the purposes of the scheme. There is a wide spread of applicable percentages ranging (on introduction of the scheme) from 5% to 14.5%.
Under the flat rate scheme businesses:
Continue to charge their customers the normal rate for the supply (i.e. not the flat rate percentage) on all taxable supplies of goods or services.
Issue tax invoices to their VAT registered customers, and also to all other customers if the business chooses to do so (these invoices show the normal rate for the supply and are used for the customers’ VAT reclaim).
They do not have to record all the details of the invoices issued or purchase invoices received to calculate the amount of VAT they must pay to HMRC.
Capital assets
If capital assets are purchased with a VAT inclusive value of £2,000 or more, the VAT can be recovered in the normal way. This concession, however, cannot be used where the assets were:
•acquired for resale, or for incorporation in goods to be sold,
•acquired to be hired out, leased or let,
•for consumption within one year, or
•covered by the capital goods scheme.
Further information
Full details of the scheme are included in VAT Notice 733 ‘Flat rate scheme for small businesses’,, which is available on the HMRC Internet site.
Computation of trading profits
The flat rate scheme removes the necessity to calculate VAT on each individual input and output for the VAT account. Instead only the flat rate VAT will need to be passed to the VAT account. Where the concession for capital assets is adopted, the VAT reclaimed will also pass through the VAT account.
Expenses will probably be shown inclusive of VAT as it is irrecoverable (similar to a business not registered for VAT), and it is likely that turnover will be shown net of the flat rate VAT payment. You may however find that the flat rate VAT payment is shown as a profit and loss expense rather than deducted from total turnover.
Where there is irrecoverable VAT on capital items it will form part of the cost of the asset on the balance sheet and of the cost for capital allowances purposes.
Example
A business has gross sales of £96,000 (including output VAT at 20% of £16,000), and expenses of £58,750 (including irrecoverable VAT). The flat rate VAT @ 6% is £5,760. A new machine is purchased (qualifying for capital allowances) at a cost of £2,400 including VAT of £400.
The accounts will show:
Turnover £90,240 (£96,000 less £5,760 flat rate VAT)
Expenses £58,750
Profit £31,490
If VAT is not reclaimed on the asset the cost for capital allowances purposes will be £2,400. If VAT is reclaimed the cost will be £2,000
The pros and cons of the Flat Rate Scheme
Benefits of using the Flat Rate Scheme
Using the Flat Rate Scheme can save you time and smooth your cash flow. It offers these benefits:
•You don’t have to record the VAT that you charge on every sale and purchase, as you do with standard VAT accounting. This can mean you spending less time on the books, and more time on your business. You do need to show VAT separately on your invoices, just as you do for normal VAT accounting.
•A first year discount. If you are in your first year of VAT registration you get a one per cent reduction in your flat rate percentage until the day before the first anniversary you became VAT registered.
•Fewer rules to follow. You no longer have to work out what VAT on purchases you can and can’t reclaim.
•Peace of mind. With less chance of mistakes, you have fewer worries about getting your VAT right.
•Certainty. You always know what percentage of your takings you will have to pay to HMRC.
Potential disadvantages of using a Flat Rate Scheme
The flat rate percentages are calculated in a way that takes into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases. So the VAT Flat Rate Scheme might not be right for your business if:
•you buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases
•you regularly receive a VAT repayment under standard VAT accounting
Even the smallest business can host an annual, tax-free social function for its entire staff, including the directors and their partners. As long as the cost per head is less than £150, employees are not taxed for having a good time, well not yet anyway, and the company benefits from full tax relief on the expense incurred.
Remember, however, that the figure of £150 is an exemption, not an allowance. If the £150 figure is exceeded, the whole amount becomes taxable for inclusion on the P11D.
Strictly speaking, all benefits are subject to tax and NICs, unless there is a specific exemption.
However, sensible practical administration of the tax system determines that benefits of a trivial nature (for example, a seasonal gift of a turkey or an ordinary bottle or two of wine) should not be treated as a benefit.
Anything more lavish in quality or quantity remains chargeable. Helpfully, there is no monetary limit to determine what a trivial benefit is.
Since April 2010 most VAT-registered businesses have been required to submit their VAT Returns online and pay any VAT due electronically. HM Revenue & Customs (HMRC) plans, from 1 April 2012, to extend this requirement to all VAT-registered businesses, apart from a very small number who will be exempt.
This guide explains what action you need to take to start submitting your VAT Returns online. It also tells you where you can get more information and advice.
The decision follows a review prompted by feedback from professional and business bodies who argued that the tax department’s “helping hand” approach to paperwork was more of a hindrance.
After reviewing the record check pilot programme and listening to these views, HMRC director of local compliance Richard Summersgill acknowledged “the need for a fresh approach”.
The results of the review published on Friday 3 Febraury, showed that of 2,437 business records checks carried out up to 4 January 2012, 28% of businesses received an “amber” rating showing the existence of some issue with their record keeping, and another 11% were rated as “red”, bad enough to require a follow-up visit.
The scheme has had a fraught gestation period, with advisers concerned about the visits turning into fishing trips for tax investigations and the stance of their professional indemnity insurers. To make matters worse, HMRC then embarked on a pilot programme last April without informing professional representatives.
While publicly Summersgill and senior HMRC figures continue to talk up the merits of helping businesses improve their record-keeping, the scheme was trimmed back from a planned 50,000 to 20,000n visits a year when the full roll-out began in September 2011.
Even with the amended programme, HMRC estimated the programme would generate benefits worth £124m from improved record keeping (and tax receipts) through the period covered by the government’s current spending review. The speed at which HMRC appeared to be implementing the programme was one source of discomfort for advisers, but following the latest review, all new appointments will be put on hold until a new process is devised and put in place after the turn of the financial year in April.
But the sting in the tail is likely to remain. Further recommendations in the latest paper call for a potential “tax intervention” if companies with inadequate records fail to improve. “In extreme circumstances a penalty might be applicable,” the internal document said. “If a business is referred for a full audit and it is found that tax returns submitted before, or after, the referral were inaccurate and that inaccuracy was a result of inadequate record keeping then a record-keeping penalty should be charged in addition to any other penalty due.”
Using cash accounting may help your cash flow, especially if your customers are slow payers. You do not need to pay VAT until you have received payment from your customers. So if a customer never pays you, you don’t have to pay VAT on that bad debt as long as you continue to use the Cash Accounting Scheme.
Disadvantages of cash accounting
Dependant on your own circumstances, there may be some disadvantages to using cash accounting:
You cannot reclaim VAT on your purchases until you have paid your suppliers. This can be a disadvantage if you buy most of your goods and services on credit.
If you regularly reclaim more VAT than you pay, you will usually receive your repayment later under cash accounting than under standard VAT accounting, unless you pay for everything at the time of purchase.
If you start using cash accounting when you start trading, you will not be able to reclaim VAT on most start up expenditure, such as initial stock, tools or machinery, until you have actually paid for those items.
If you leave the Cash Accounting Scheme you will have to account for all outstanding VAT due including any bad debts.
Additional record-keeping for the Cash Accounting Scheme
Changing to cash accounting doesn’t mean you can just keep a record of your cash position – you must also keep track of debtors and creditors, so you know the real position with regard to what you owe and are owed. You need this information for Income Tax or Corporation Tax purposes.
In addition to keeping all required VAT records and accounts for standard VAT accounting, you must also use the following procedures for sales and purchases.
Invoices
If you are paid in cash you must, if asked by your customer, endorse the customer’s copy of your sales invoice with the amount and date paid.
If you settle an invoice using cash, you must keep a copy of the purchase invoice endorsed with the amount and date paid.
Payment records
Your records must clearly cross-refer payments received or made by you to the corresponding sales or purchase invoices. You must also make sure that you cross-refer these payments and receipts to evidence such as bank statements, cheque stubs and paying-in slips.
HM Revenue & Customs (HMRC) today announced an initiative to crack down on VAT rule breakers. The new campaign will focus on individuals and businesses who are trading above the VAT threshold but who have not yet registered for VAT.
The initiative is being discussed with interested parties to ensure HMRC has as much information from them as possible before launching the campaign later in the summer.
Mike Wells, HMRC’s Director of Risk and Intelligence, said:
“Our aim is to get as much input as possible into our future campaigns so that the views and experience of people and organisations outside the department play a fuller part in what we design for customers.
“We are already in contact with a number of interested parties and I expect many more to contact us with their views before we finalise the design of the VAT initiative.
“This will be the model for all our future campaigns and we look forward to being even more open about the compliance activity HMRC is undertaking to ensure we reduce the tax gap and help customers pay what they owe.”
Each HMRC campaign is aimed at reducing the tax gap by focusing on areas where a significant underpayment has been identified. The department provides simple, straightforward opportunities for customers to put their records in order on the best possible terms, followed immediately by activity focused on the non-compliant who choose not to take up the opportunity. HMRC has raised over £500m from voluntary disclosures and a further £100m so far from follow-up activity.
Previous campaigns have targeted offshore investments, medical professionals and people working in the plumbing industry. For each HMRC has used new technology and legislation to gather and analyse data, from internal and external sources, to identify people who should come forward. This has provided thousands more investigations, now being worked through, including a number of criminal investigations.
To join the VAT Initiative discussion, individuals, organisations or businesses should contact Nicky Prys-Jones (Nicola.j.prys-jones@hmrc.gsi.gov.uk).
Notes to editors
1. The VAT threshold is currently £73,000 turnover on a rolling annual basis. In previous years it was: 2006/07 – £61,000; 2007/08 – £64,000; 2008/09 – £67,000; 2009/10 – £68,000; 2010/11 – £70,000.
2. HMRC encourages anyone who has unpaid tax to come forward and make a voluntary disclosure; it will always be less expensive if customers come to HMRC voluntarily rather than wait until we catch up with them.
3. Anyone working in the plumbing industry who has unpaid tax should contact HMRC on 0845 600 4507 before 31 May to register their intention to use the Plumbers Tax Safe Plan (http://www.hmrc.gov.uk/trades-disclosure/index.htm).
4. Anybody targeted by a previous campaign will not be able to use a subsequent campaign to disclose liabilities.
5. Summary information on existing and future campaigns activity will be available shortly on the HMRC website.
