HMRC is in the process of writing to businesses which it believes are trading above the VAT threshold, but who are not currently VAT registered. Today’s Blog explains what to do if such a letter arrives.
VAT Evader Trader Background
A business is required to register for VAT once its taxable turnover over the previous 12 months exceeds a £85,000 threshold over a rolling 12-month period. This is calculated by simply adding the current month, say February and deleting the equivalent month from 12 months earlier; so, it’s not a fixed year, such as for your tax return. Exempt sales, such as land or insurance, do not count towards this threshold, however, zero-rated sales, such as books and children’s clothing, and any 5% reduced-rated sales do.
Any business is required to notify HMRC within 30 days of the month’s end when it exceeded the £85,000 threshold and will then be registered from the first day of the succeeding month. For more information go to: https://www.gov.uk/vat-registration/when-to-register
Delays in the VAT Return system
Due to the nature of the self-assessment tax system, the information HMRC holds for business which do not complete VAT returns can be over a year out of date. For self-employed traders this will be the profits up to the 5th April 2020, and for companies potentially as far back as 29th 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.
VAT Evader Trader: First step
If you’ve received such a letter, as a first step you should review your rolling 12-month turnover figures to ensure at no point did you breach the £85,000 threshold. This review should extend back two years just to be on the safe side. If your review does not reveal a requirement to register, either current or historic, then you should reply to the HMRC letter and confirm this. This should prevent HMRC following up with further letters unnecessarily, but they may ask for a copy of your review of earlier months.
Also, do not assume that HMRC has sent a copy of the letter to your accountants, this will not have happened, so they will be totally unaware of the situation. It is therefore vital that you get a copy to them immediately, as they can help mitigate any penalties if you have missed the registration deadline.
Penalties await the laggards
HMRC can charge a penalty when 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.
If a business registers late, but does so before HMRC have contacted them, then the penalty is likely to be at the bottom of the range and may even be waived if the trader has a reasonable excuse, such as Covid-19 issues e.g., a death or serious illness in the family.
If VAT registration is necessary
If VAT registration is required, regardless of whether the applicable deadline has been missed or not, you should immediately register for VAT online. However, currently HMRC has built up around a 3-month backlog of forms to process. So, if you have applied for VAT registration in the last few months, do not panic as it’s likely that HMRC has not processed your application yet.
Also, even though you don’t have a VAT registration number, you must still charge VAT as if you were registered and endorse your sales invoice, ‘VAT Number applied for’ or similar such phrase.
If you should have registered from an earlier date, VAT will become due on any sales made since that date, but on the other hand, you can recover any VAT suffered on business purchases/expenses. Also, a business can also recover VAT paid in the previous four years for physical items still held at registration, or within the last six months for services incurred and paid for prior to the date of registration.
Unfortunately, if you’re late registering any sales made in the period from when it was obligatory, to the present day, will be liable to Output Tax. So, you may need to issue additional invoices to any affected customers for VAT that should have been charged historically. If the customer is VAT registered this will not represent additional cost to them, as they will recover any VAT paid, however if they’re not registered, they can refuse to pay the supplementary invoice which means that you are liable to pay the VAT yourself.
VAT Evader Trader: Possible ‘get out of jail’ card
If the outcome of your review of the last two years shows that the threshold was exceeded in a previous 12 month period, but that turnover subsequently fell back and the 12 month rolling turnover ever since has been below the threshold (and is expected to remain below the threshold going forwards for at least 12 months), it is important that you still complete the registration forms but tick the box to request exception from registration.
If HMRC agrees that the exception applies, you will not be required to register, but you must continue to review your turnover. 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.