Cash Clinic: VAT clampdown sparks fears over HRMC inquiries

Question: I am an electrician and have been told that HM Revenue & Customs is cracking down on sole traders who have not registered for VAT. The problem I have is that my turnover is around the VAT limit, but I have delayed registering because I thought there would be more paperwork. I'm also worried that the extra VAT cost would increase how much I have to charge and put off customers. What should I do? CR Dunfermline

Answer: HMRC is indeed beginning to target unregistered sole traders and businesses across Scotland. Its new campaign on VAT registration will be driven by simple data analysis. It is identifying individuals and businesses that have returned annual turnover above or very close to the annual VAT registration threshold, currently 73,000, and checking to see if they are VAT registered.

If your turnover is around the 73,000 mark, then you should seriously consider registering for VAT. Yes, there is more paperwork but there are also benefits for you as a trader. You will be able to reclaim VAT charges, which are currently applied to you against the VAT that you charge customers. It is actually easier now to deal with the paperwork than ever before with online filing and the VAT flat-rate scheme making it much simpler to operate as a registered business.

In the short term, HMRC is planning to offer an amnesty period to allow traders to register before they are investigated. It will, therefore, offer low penalties for those who come clean, but follow up with detailed investigations into those who don't. For example, if you have turnover just below the VAT registration threshold every year on your income tax return and don't use any amnesty that is offered, you can expect a compliance visit or business records check from HMRC in the future.

The normal penalties and surcharges for failing to register for VAT are so severe that anyone who lets things slide for a year or more will be facing a huge bill if they do eventually decide to come clean by registering.

So, if the low penalty for voluntary disclosure is similar to those offered with HMRC's direct tax disclosure facilities in recent years, it could turn out to be a very good deal.

Normal VAT registration penalties are as follows: n Where the failure to register was not deliberate, penalties are up to 30 per cent of the unpaid VAT. Penalties are unlikely to exceed 10 per cent if the liability to register is disclosed to HMRC within 12 months. No penalty is payable if the business can show it had a reasonable excuse for not registering on time.

• Where failure to register was deliberate, penalties can be as high as 100 per cent of the unpaid VAT, although an unprompted disclosure could reduce this considerably, possibly as far as 20 per cent.

I hope that helps.• Billy Cairns is a VAT partner at accountants and business advisers PKF

If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd accepts no liability on the basis of this article.