It sounds almost friendly doesn’t it? No hint of a threat of any big investigation into your financial affairs, or any penalties. But don’t be complacent about it. For all of the soft PR in which this campaign’s been cloaked, there’s still an iron fist within the velvet glove, and if your VAT accounting isn’t up to date, you could find yourself in big trouble.
The ’normal’ way to do VAT
With very, very, few exceptions, almost every VAT-registered business today is supposed to file their VAT return online and use an electronic payment system usually direct debit to settle any liability due to HMRC. In practice, this means that the business has gained an extra seven days to file the return (compared to the old paper returns) and then another three working days before the payment leaves the bank. For example, take a VAT quarter that ended on December 31, 2012. The return has to be filed online by February 7, 2013, and the subsequent direct debit payment will leave your bank account around February 12. All pretty straightforward and, for most businesses, it’s not particularly onerous to comply. After all, it gives you around five weeks after the end of each VAT quarter to calculate the amount of VAT due to HMRC or repayable to you, and the returns take minutes to file. You don’t even need to do it yourself your accountant can act as your agent, and do the online returns on your behalf, which can speed things up a little if you’re particularly slow at giving the raw accounting data to the accountant in the first place!
What if you can’t make the deadline?
There may occasionally be exceptional circumstances that prevent you from compiling the quarter’s sales and purchase data on time. There may be a major accounting query that affects the calculation of the VAT liability and takes additional time to resolve.
A delay in filing returns or making a payment by the due date usually results in a Surcharge Liability Notice from HMRC, warning that the business is in ’default’ and telling you what penalties will apply if it happens again in the next 12 months. For the majority of businesses, that’s enough they’re extremely unlikely to be late again within the next year.
Making a habit of it
There are some people though, for whom missing return deadlines is a habit they’re so disorganised or so poor at paperwork that it just happens. They will complain about the penalties but won’t sort out their book-keeping or accounting to avoid incurring them. And then there are some traders who simply don’t play the game at all. They’ve found that if they fail to make a return, HMRC will issue an assessment for the amount of VAT they believe is due and that assessment can be significantly lower than the real amount owed. So they chance it again, and even with a penalty surcharge, the amount is still less than they really owe.
why a Campaign?
The scope of HMRC’s responsibilities increases every time a Chancellor stands up in the Commons to make another Budget Statement. Meanwhile, in common with most civil service departments, they’ve faced staff cuts almost continually for years. So, rather than trying to control everything at once, they work by targeting particular ’risk’ groups one at a time. And it’s easier for them if at least some of the suspected naughty people come clean and settle with them first. This campaign is aimed specifically at VAT-registered businesses which habitually fail to make proper returns and appear to get away with paying only on assessment.
The velvet glove
If you’re in that position, the chances are that you may owe a considerable amount of VAT. They’re giving you until February 28 to complete proper returns for all outstanding VAT periods and pay any money that you may owe (and if you’ve already paid some on assessment, the balance may not be too horrendous). You are likely to face interest on overdue amounts from prior periods, and possibly some penalty surcharges, but effectively the slate will then be wiped clean and there’ll be no further action. Incidentally, there may be people who have failed to make returns because they’ve left their business (sold it, retired, etc) and who’ve simply failed to notify HMRC of the change, or failed to de-register for VAT.
Again, anyone in this position should make their declarations to HMRC before February 28.
The Iron fist
If you have any history of outstanding returns and fail to make the voluntary declarations by the end of February, they’re going to come looking for you, and it won’t be pleasant. This is what they are saying: "HMRC will be targeting businesses that have been identified as not having made a VAT return by the due dates. They will compare information from various sources and will target those who should have sent in a return but have failed to do so. HMRC may carry out checks into your tax affairs or use legal powers to get detailed information about your finances.
"If you are found to owe VAT you may face higher penalties than if you come forward voluntarily. You may even face a criminal investigation." So potentially expect investigators to go through all of your business records and even your personal financial records. And take it as given that any penalties will be considerably higher after an investigation than before one.
What to do if you’re at risk
Contact your accountant urgently. Be ready with your sales and purchase records going back to any relevant VAT period. The accountant should be able to calculate the true amount of VAT you owe (or is maybe owed to you) and make the necessary declaration on your behalf. Don’t expect it to be cheap, but whatever they charge is likely to be a lot less expensive, and a lot less unpleasant, than if you wait for HMRC to come calling.