Category: Value Added Tax

The first monthly returns and payments affected by HMRC’s new VAT penalty regime were due by 7 March 2023. The new VAT penalty rules apply to the late submission and / or late payments of VAT returns for VAT return periods beginning on or after 1 January 2023. 

Under the new regime, there are separate penalties for late VAT returns and late payment of VAT as well as a new methodology to the way interest is charged. This replaces the old default surcharge regime and for most taxpayers should represent a fairer system.

The new system is points-based. This means that taxpayers will incur a penalty point for each missed VAT submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold varies depending on the required submission frequency (monthly, quarterly, annual). For quarterly VAT returns, the penalty points threshold will be 4 points. The penalty points will reset to zero following a period of compliance, for quarterly returns this requires 12-months of compliance. There are also time limits after which a point cannot be levied. 

The new regime also sees the introduction of two new late payment penalties. A first payment penalty of 2% of the unpaid tax that remains outstanding 16-30 days after the due date. The second payment penalty increases to 4% of any unpaid tax that is 31 or more days overdue. To help with the introduction of the new system, HMRC has confirmed that it will not be charging a first late payment penalty for the first year of the new regime (1 January – 31 December 2023) once the debt is paid in full within 30-days of the payment due date or if a payment plan is agreed.

Late payment interest will be charged from the date a payment is overdue, until the date it is paid in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.

The first monthly returns and payments affected by HMRC’s new VAT penalty regime are due by 7 March 2023. The new rules apply to the late submission and / or late payments of VAT returns for VAT return periods beginning on or after 1 January 2023. 

Under the new regime, there are separate penalties for late VAT returns and late payment of VAT as well as a new methodology to the way interest is charged. This replaces the old default surcharge regime and for most taxpayers should represent a fairer system.

The new system is points-based. This means that taxpayers will incur a penalty point for each missed VAT submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold varies depending on the required submission frequency (monthly, quarterly, annual). For quarterly VAT returns, the penalty points threshold will be 4 points. The penalty points will reset to zero following a period of compliance, for quarterly returns this requires 12-months of compliance. There are also time limits after which a point cannot be levied. 

In addition, the new system sees the introduction of two new late payment penalties. A first payment penalty of 2% of the unpaid tax that remains outstanding 16-30 days after the due date. The second payment penalty increases to 4% of any unpaid tax that is 31 or more days overdue. To help with the introduction of the new system, HMRC has confirmed that will not be charging a first late payment penalty for the first year of the new regime (1 January – 31 December 2023) once the debt is paid in full within 30-days of the payment due date or if a payment plan is agreed.

Late payment interest will be charged from the date a payment is overdue, until the date it is paid in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.

The transfer of a business as a going concern (TOGC) rules concern the VAT liability of the sale of a business. Normally the sale of the assets of a VAT registered or VAT registerable business will be subject to VAT at the appropriate rate.

Where the sale of a business includes assets and meets certain conditions, the sale will be categorised as a TOGC. A TOGC is defined as 'neither a supply of goods nor a supply of services' and is therefore outside the scope of VAT. Under the TOGC rules no VAT would be chargeable on a qualifying sale.

All the following conditions are necessary for the TOGC rules to apply:

• The assets must be sold as part of a 'business' as a 'going concern'. In essence, the business must be operating as such and not just an 'inert aggregation of assets'.
• The purchaser intends to use the assets to carry on the same kind of business as the seller.
• Where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer.
• Where only part of a business is sold it must be capable of separate operation.
• There must not be a series of immediately consecutive transfers.
• There are further conditions in relation to transactions involving land.

The TOGC rules can be complex, and both the vendor and purchaser of a business must ensure that the rules are properly followed. The TOGC rules are also mandatory which means that it is imperative to establish from the outset whether a sale is or is not a TOGC. For example, if VAT is charged in error, the buyer has no legal right to recover it from HMRC and would have to seek to recover this 'VAT' from the seller.

If you are required to register your business for VAT purposes you are joining that reluctant band of business owners that are obliged to collect tax for HMRC.

The amount of VAT you have added to your sales, less VAT you have paid out on qualifying purchases, will be paid to HMRC at the required intervals, usually quarterly. As long as your customers pay you the VAT added, over time there should be no effect on your profits, but there can be dramatic impacts on cash flow.

Unfortunately, this is not the end of your responsibilities to act as unpaid tax collectors.

If you employ a person, and HMRC considers that their salary should be reduced by Income Tax and National Insurance contributions, it is your legal duty to make these deductions and pay them directly, every month, to the Collector of Taxes.

As with VAT registered traders, there is no increase in costs to an employer if employee contributions (Income Tax and National Insurance) are considered in isolation. However, employers also have to pay a separate National Insurance Contribution (NIC) and these are added to monthly payments to HMRC.

Therefore, these employer NIC contributions are a cost to the employer’s business.

We are not aware of the overall costs to UK businesses of calculating PAYE and NIC to meet these demands, but it must be considerable.

The alternative would be to make employees responsible for calculating Income Tax and NIC deductions and paying their taxes individually instead of receiving wages and salaries net of these deductions.

However, UK business owners need to be aware of these obligations and take them into account as the tax collection activities will take up time or increase overheads.

The taxable turnover threshold, that determines whether businesses should be registered for VAT, is currently £85,000.

The taxable turnover threshold that determines whether businesses can apply for deregistration is £83,000.

It was confirmed as part of the Autumn Statement 2022 measures that the taxable turnover registration and deregistration thresholds will be frozen at the current rates until 31 March 2026.

Businesses are required to register for VAT if they meet either of the following two conditions:

1. At the end of any month, the value of the taxable supplies made in the past 12 months or less has exceeded £85,000; or
2. At any time, there are reasonable grounds for believing that the value of taxable supplies to be made in the next 30 days alone will exceed £85,000.

The registration threshold for relevant acquisitions from other EU Member States into Northern Ireland is also £85,000.

Businesses with no physical presence in the UK may also have a liability to be VAT registered in the UK if they supply any goods or services to the UK (or are expected to in the next 30-days).

The VAT One Stop Shop is an EU wide scheme that allows a VAT registered business to register in only one single EU Member State. The scheme was extended with effect from 1 July 2021. The extended scheme covers three special schemes: the non-Union scheme, the Union scheme and the import scheme. 

The VAT One Stop Shop scheme can be used by businesses selling goods from Northern Ireland to consumers in the EU under the terms of the Northern Ireland Protocol. In order to use the scheme, sales must be above the distance selling limit of €10,000 – currently set at £8,818. The scheme only covers the sale of goods. Supplies of digital services to consumers in the EU should not be reported.

Using the VAT One Stop Shop can save affected businesses from having to register for VAT in up to 27 EU countries. If a qualifying Northern Ireland business chooses not to use the scheme, they will have to register for VAT in each EU country where they make distance sales of goods.

A new VAT penalty regime will affect all VAT registered businesses from 1 January 2023. The changes will apply to the late submission and / or late payments of VAT returns for VAT return periods beginning on or after 1 January 2023. 

Under the new regime, there will be separate penalties for late VAT returns and late payment of VAT as well as a new methodology to the way interest is charged. This will replace the default surcharge regime and for most taxpayers should represent a fairer system.

The new system will be points-based. This means that taxpayers will incur a penalty point for each missed submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold varies depending on the required submission frequency (monthly, quarterly, annual). For quarterly VAT returns, the penalty points threshold will be 4 points. The penalty points will reset to zero following a period of compliance, for quarterly returns this requires 12 months of compliance. There are also time limits after which a point cannot be levied. 

In addition, the new system will see the introduction of two new late payment penalties. A first payment penalty of 2% of the unpaid tax that remains outstanding 16-30 days after the due date. The second payment penalty increases to 4% of any unpaid tax that is 31 or more days overdue.

To help with the introduction of the new system, HMRC has confirmed that it will not be charging a first late payment penalty for the first year of the new regime (1 January – 31 December 2023) once the debt is paid in full within 30 days of your payment due date.

Late payment interest will be charged from the date a payment is overdue, until the date it is paid in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.

There are special rules that determine the recoverability of pre-trading VAT costs. Pre-trading VAT costs describe VAT that was incurred before a business registered for VAT and is known as pre-registration input VAT.

There are different rules for the supply of goods and services, but VAT can only be reclaimed if the pre-registration expenses relate to the supply of taxable goods or services by the newly VAT registered business.

The time limit is backdated from the date of registration and is:

• 4 years for goods you still have or goods that were used to make other goods you still have; and
• 6 months for services.

The VAT should be reclaimed on the business's first VAT return. When a new VAT registration is applied for it may be possible to backdate the registration (known as the effective date of registration). This should be considered if there is additional input tax that will be made recoverable.

There are special rules for partially exempt businesses and for businesses that have non-business income and for the purchase of capital items within the Capital Goods Scheme (CGS).

A business that incurs expenditure on taxable and exempt business activities is partially exempt for VAT purposes.

This means that the business is required to make an apportionment between the activities using a 'partial exemption method' in order to calculate how much input tax is recoverable.

Businesses that make both taxable and exempt supplies must keep a separate record of exempt supplies along with details of how much VAT has been reclaimed.

There are a number of partial exemption methods available. The standard method of recovering any remaining input tax is to apply the ratio of the value of taxable supplies to total supplies, subject to the exclusion of certain items which could prove distortive. The standard method is automatically overridden where it produces a result that differs substantially from one based on the actual use of inputs. It is possible to agree a special method with HMRC.

The VAT incurred on exempt supplies can be recovered subject to two parallel de-minimis limits.

The tests are met where the total value of exempt input tax:

1. Is under £625 a month (£1,875 a quarter/£7,500 a year); and
2. Is less than half of the total input tax incurred.

If both tests are met the VAT can be recovered. Businesses that are partially exempt, need to complete this calculation on a quarterly and annual basis.

The ability to check a UK VAT number is available at: www.gov.uk/check-uk-vat-number.

This service allows users to check:

• if a UK VAT registration number is valid; and
• the name and address of the business the number is registered to.

The service also allows UK taxpayers to obtain a certificate to prove that they checked that a VAT registration number was valid at a given time and date. The certificate will provide valuable evidence for a taxpayer to prove that they acted in good faith should HMRC challenge input tax recovery or seek payment of lost VAT.

The European Commission website also includes an on-line service which allows taxpayers to check if a quoted VAT number from anywhere in the EU is valid. The on-line service is available at: https://ec.europa.eu/taxation_customs/vies/#/vat-validation