Don’t miss window of opportunity for tax deal

As THE old saying has it, the only things which are certain in life are death and taxes. It’s at least half true: we can’t avoid death. The situation with tax is, however, a little more complex.

All of us are expected to hand over part of our income, spending or business turnover to the government. In reality, for various reasons, avoidance, ignorance, confusion or downright evasion, some of us fail to do so.

This isn’t always deliberate. VAT in particular is a complicated tax, yet it is one which many small businesses and even sole traders are expected to pay. And the onus isn’t on HM Revenue and Customs (HMRC) to chase them and remind them if it’s due. It’s down to the individual or company concerned to assess whether they are liable, and then make arrangements to register and pay.

By law, businesses turning over more than £73,000 a year by supplying services or goods in the UK or the rest of the EU must register for VAT and then start collecting it, normally at the current standard rate of 20 per cent, from their customers.

They then send a regular VAT return to the authorities along with payment. In most cases this is a relatively simple procedure, but it is thought that thousands of Scottish businesses and traders haven’t bothered to register and so are breaking the law.

In theory, if caught, they could be forced to pay the money owing along with a fine of up to 100 per cent – in other words, as much again.

However, HMRC is currently offering a summer amnesty which runs until 30 September.

Anyone who has failed to register in the past now has the chance to come clean and do so. If they take advantage of the offer, they will only have to pay the back amounts due plus a small penalty of 10 per cent – and in many cases, there will be no fine at all.

Lynn Gemmell is director of VAT Services for the Edinburgh-based accountancy firm Chiene + Tait. She explains: “In July, HMRC sent out letters to some 40,000 businesses across the UK to say that this initiative was taking place. The aim was to encourage them to come forward and register.

“Quite a lot of businesses don’t really think about VAT or don’t have a full understanding of the issues.

“They believe that they’re not liable because they’re not making a profit or they think they’re exempt or zero rated.”

She points out that as HMRC officials have already identified 40,000 British companies to post letters to, they may well have a pretty good idea of the firms and individuals involved.

Anyone receiving one of these communications should immediately examine their VAT affairs and, if they find they are liable, own up without delay. Should they fail to do so by the 30 September deadline, the taxman may well launch his own investigations into these companies and if they are discovered to have broken the law, the normal full penalties of back tax plus a 100 per cent surcharge will apply.

Gemmell says that the amnesty should act as a wake-up call to any firm which has not so far registered to check its VAT status.

“HMRC has agreed that if a company now registers under the terms of the initiative and does so not more than 12 months after it should have done, it will only have to pay the back tax – the penalty will be reduced to nil. If registration is more than 12 months overdue, then the back tax will have to be paid along with a reduced penalty of 10 per cent.”

One of the biggest errors companies make is to assume that they are liable for VAT on their profits. They are not – they have to pay it on their turnover. This means that in theory they could be liable for tax even if they’re making a loss, particularly if they’re buying in and selling stock.

Another misunderstanding which can occur is when they receive goods or services from other countries in the EU. Even if the company has no taxable income in the UK, these transactions may need to be declared and accounted for for VAT purposes (different rules apply to non-EU countries).

The rules for charities, too, can be obscure and confusing. Ms Gemmell explains: “Some charities think that their grant income is always outside the scope of VAT, but where local authorities procure services from them in return for funding, that may not be the case and the income may fall within the scope of the tax.

“If they second staff to other organisations that can also cause a problem because if the placement is charged for, it can increase the charity’s turnover significantly and have VAT consequences.”

Her advice is clear: if you have not registered for the tax and think there is the slightest chance that you may be liable, then contact your accountant immediately and ask them to go through your books and recent figures.

If it turns out that you should have registered earlier, then ensure that you notify HMRC by the 30 September deadline that you want to take part in the initiative.

You must then complete your registration by 31 December.

For many people, making a voluntary admission that you owe tax knowing a bill will be involved isn’t the easiest thing in the world. But Gemmell warns against prevarication.

“The simple fact is that your liability isn’t going to go away if you don’t take advantage of this initiative. By doing so, at least you won’t have to pay a 100 per cent penalty.

“And if you don’t have all the money right now, the VAT people have indicated they will be prepared to accept the money owing in instalments.

“You can talk to them later about that.”