April changes push VAT up the agenda

It seems more people are taking an interest in VAT. That can only be good news for those who make a living from the indirect tax, writes Les Howard of Vatadvice.org.

From the beginning of April, all remaining VAT registered businesses will have to file their VAT returns online and pay electronically from 1 April 2012, but AccountingWEB’s editors noticed a lot of people are taking a renewed interest in the VAT registration threshold. On average around 150 people are checking Nigel Harris’s article on the threshold changes announced last March that came into force at the beginning of April 2011.

AccountingWEB’s tax editor, Rebecca Benneyworth speculated whether the two issues might be related. Could companies or advisers who have clients hovering around the threshold be checking to see if it’s feasible to deregistration and thus avoid the hassle of online filing? For quick reference, the deregistration threshold is currently £71,000.

To fill out the picture, this article will recap some of the points affecting business taxpayers, and suggest a simplification measure that would remove one unfair aspect of the current arrangement.

Background

The registration threshold - currently £73,000 - is the value of taxable supplies made by a person at which he or she is required to be registered for VAT. It is obligatory.

Where taxable supplies are less than this figure, the taxpayer can choose to register. Where they make business-to-business (B2B) supplies, as a rule of thumb, it will be worthwhile registering long before the threshold is reached. Indeed, some 20% of all VAT registrations trade below the threshold.

There is a distinction between “taxable supplies” and “exempt supplies”. Exempt supplies include services such as education, finance, health and so on. Such income is not counted for VAT registration purposes. A business having only exempt income cannot register for VAT (unless as part of a Ggoup registration).

Getting it wrong

VAT is very expensive if you get it wrong! With the standard rate at 20%, and penalties for misdemeanours, errors can be costly. So, if someone is late registering for VAT, the implications can be significant. With VAT being a key part of business life, it is striking how many people still register late.

From 1 April 2010, new penalty legislation applies to people who are late in notifying their liability to register. As with Self Assessment and PAYE penalties, the rates depend on whether the failure was careless or deliberate.

In some cases, a business that registers late can go back to customers and ask them for the VAT. However, this needs to be managed carefully, so as not to give the impression of a badly run business.

Recent developments

But it’s not just the threshold increase and “digital by default” that have raised the profile of registration. HMRC has targeted different business sectors with task forces to identify and collect underdeclared tax, including VAT. One of the key questions has been whether businesses should be registered for VAT. The VAT campaign result has prompted a leap in new VAT registrations; the mere threat of official HMRC action appears to have encouraged many small businesses to register.

Why have a registration threshold?

For many businesses, the threshold creates a real hurdle. This is particularly the case with retail businesses providing services, such as hairdressers, painters and decorators, etc. Once their turnover jumps from just-under to just-over the threshold, there is a potential loss of £10,000 or more in a year.

The main reason, I suggest, that HMRC has a threshold at all is to save costs.  Comparing the cost of managing a VAT-registered business against the tax revenue it produces suggests that it is less profitable for HMRC to maintain (or restore) a low registration threshold. The comparative benefit for small business is much less.

Interestingly, on the continent the thresholds tend to be lower. My own view is that everyone in business should be registered. This would remove the artificial hurdle that exists. It would also assist with identifying those who deliberately evade VAT by not registering.

Les Howard is a freelance VAT Consultant, working with SMEs and Charities, and providing specialist support for independent accountancy practices. He post regular items in his Vatadvice.org blog on AccountingWEB.

Comments
taxhound's picture

VAT thresholds    1 thanks

taxhound | | Permalink

£71k and £73k as deregistration and registration thresholds were introduced from 1 April 2011...

Have new thresholds been announced for 1/4/12 yet?

tim@charlesaccountancy.com's picture

New VAT registration

tim@charlesacco... | | Permalink

New VAT registration thresholds should be announced at the 2012 budget.

However very strange for this article to appear dated 9/3/12, as it's a year out of date.

www.charlesaccountancy.com

 

 

 

John Stokdyk's picture

Mea culpa

John Stokdyk | | Permalink

Thanks @taxhound and @tim for highlighting the date discrepancy, which is entirely my fault and not Les Howard's.

I wanted to refer readers back to the basic Budget 2011 summary of the new rates and in my enthusiasm to link the popularity of that piece to the April 2012 online filing requirements, I read the latter date for the other.

It's not a productive trait to display in the run up to a new tax year, for which I apologise to all concerned. Please don't let my inept editorial intervention detract from the rest of the article, or Les's interesting proposal to eliminate the registration threshold altogether.

VAT return on line filing

M Shapland | | Permalink

I think that HMRC's guidance is very misleading as it is saying that all VAT returns filed after 1 April 2012 must be filed electronically. This is not strictly correct as in fact:-

The first VAT return for which online filing and payment will be compulsory will be the first period beginning on or after 1st April 2012.For business with quarterly returns this will generally mean VAT returns to June, July or August 2012.

So technically returns with quarter ending  31 March 2012, 30 April 2012 and 31 May 2012 could send paper returns.

Of course most business with access to internet or who have not but have agents willing to file the return on line for them should have registered by now.

But is it not typical of HMRC to drop certain bit of information from their guidance and to make people dig deep to find the actual correct information...

 

 

VAT registration

janeblewis | | Permalink

I was assuming that the introduction of the Flat Rate Scheme was a precursor to compulsory registration for all.

And may well be in the future, I guess.

 

I do agree that all businesses should register and then all are on a 'level playing field'.

I run a business just approaching the VAT registration threshold and with no prospect of raising my prices, must soon accept a sudden 'loss' of £10,000 - oh joy!

Price reduction?

watercleaves | | Permalink

How about reducing your prices for a while to make sure you stay just below the threshhold? You gain, your customers gain, the tax man loses, and the point of this article is very strongly reinforced!

Registration for all?

aristotle341 | | Permalink

Would this include sole traders? Or just companies? The latter would be an unworkable disaster. A business that buys and sells, say, second hand goods would then have to apply VAT to the goods they sell - whereas as sole trader would not, giving the sole trader a 20% price advantage.

NO VAT THRESHOLD

markgosling | | Permalink

I fully understand that the VAT threshold as it stands is a major problem for businesses that trade near the threshold. However I do not agree that all businesses should be registered for VAT.

The aim of governement is to make things simpler for the small business. I have many small life style clients with a turnover of under £20,000. Many would not survive if they had to pay VAT and pay me to file VAT returns. It would simply encourage the black market or some to go on the dole.

 

 

Why have a registration threshold?

scottwright94 | | Permalink

A relatively interesting and informative read until the author weighs in with their own opinion grounded solidly in vested interest rather than sensibility. VAT is bad for the economy and dropping the registration threshold lower (or obliterating it) would be an unmitigated disaster.

Registration for all businesses?

Wiganer Elaine | | Permalink

Surely if the principle behind VAT is to levy further taxes on joe public then it should follow that all businesses which provide goods and services that are subject to vat should in fact be vat registered, irrespective of their turnover? 

 

cfield's picture

The worst possible figure to have as a threshold

cfield | | Permalink

The current registration threshold of £73,000 is probably the worst possible figure because it acts as a disincentive for successful local businesses to take the next step and grow larger.

Firstly it encourages traders to stay below the threshold either by turning down work or simply not declaring some of their cash in hand work.

Secondly it allows the small traders to undercut slightly larger businesses, thus making it difficult for the latter to thrive. These are the very up-and-coming businesses that we are relying on to drive economic growth, yet we make it difficult for them to compete with their smaller brethren by forcing them to trade at a disadvantage. 

Having said that, it would hit a large section of society very hard if small traders were forced to charge VAT. Both they and their customers would suffer, and that's the last thing we need at the moment. It wouldn't exactly encourage more consumer spending.

I think the answer is to have a much lower threshold (say £30,000) so as to exclude the really small businesses but also allow a similar figure to be exempt from output tax, so that VAT is not such a cliff-edge tax. The trader would only then have to increase prices slightly to start with, which would mitigate the effect on both them and the consumer.

Alternatively you could have a lower rate for certain bands of turnover, which would have the same effect. These reforms would remove an artificial barrier to growth whilst not making the impact so sudden and severe that it deters economic activity.

Whilst they are at it, they should also allow small building firms to deduct materials and labour costs from their turnover for registration purposes. In other words, the threshold should be based on gross profit rather than turnover. 

The same would go for the "exempt" band and/or "lower rate" band referred to above, so that creating and taking on large jobs would not unduly penalise either the trader or the consumer. Obviously you would need to restrict input tax too if you did this.

It would also a) avoid compulsory registration for small firms taking on a few big jobs with high materials costs, and b) encourage such firms to take on casual labour as they would not be forced to register for VAT as a consequence of higher turnover to pay for the wages.

Sadly this would probably be seen as complicating the tax system, and of course simplication is the buzz word now. They've got it in their heads that a complicated tax system is holding the economy back, so a reform like this would probably never see the light of day.

Shame really as it could be made fiscally neutral (thus not harming the econmy) and be a rare example of a tax reform that actually boosts the economy.

Chris

VAT

nickselectaccounting | | Permalink

I do not normally write posts, due to time however I felt compelled to add a comment here, not that it will have an effect . . . I am a small practice and still quite young.

Value Added Tax is always going to be a thorn in the side of any business teetering along the threshold. . . It is a valueless tax to small businesses, that often do not have the expertise or budget to instruct an agent to look at this.

I clearly think that the VAT registration threshold should be considered. I work with a lot of small businesses and there can be argueably be more risk and compliance work with VAT returns that anything else.

I find it quite interesting when a lot of small businesses, who are supposed to be the key driver to our economy, as per the coallition, are exposed to, quite frankly, extortionate penalties, when they are ill equiped to deal with the expansive law surrounding it. Yes if they have a good Accountant / Tax advisor, then this should be mitigated however, the question remains, why should they?

On the whole though, I believe that VAT system is a fair system for collecting taxes into the public purse. It captures everyone. Everyone that is fiddling the system, as they are all out there. . .

I think the threshold should be increased, to give businesses time to grow and develop before having to spend time and resources, both monetary and mentally, before being forced into this position.

I also think that the penalty system, for VAT, should be used as a last resort and geared towards education first, rather than revenue generating. I disagree for penalties for genuine mistakes. I would tier the VAT penalty system such that, imagine business a, being VAT registered for 30 years makes the same mistake as someone who has just submitted their first VAT return. Is it just and equitable for the penalty to be the same? 

There is an argument for making all businesses register for VAT, as the entrepreneurs will be mindful of it from the outset, however would it put off some entrepreneurs and adversly affect our economy? It would possibly identify illegal traders and encourage them to become legal.

Reference the problem as regards registering for VAT, I would suggest a monetary incentive for businesses to register. IE a £1,000 bonus to register on time. .  It would go a way towards the bitter pill that has to be swallowed when first starting the road to VAT.

 

Whatever happens, it will always be a bone of contention with some. . . .as there is never a right or wrong way and there are always opinionated people out there, myself included. . . .

Vat Registration for All Businesses

Wiganer Elaine | | Permalink

If all businesses selling goods and services subject to vat had to register then all prices should be shown Net + Vat = Gross or state if it was Vat exempt. If the vat rate increases, the vat element and the gross obviously increases but the net (the bit the business actually receives!!) doesn't. This way joe public would see exactly how much tax effectively goes directly to the government and realise that they are not really being ripped off by the business owner.

If the price of goods and services had to be shown in this way, I'm sure that the many complications within the vat legislation would end up being simplified. In particular, you would have to have definite answers on what was standard or zero rated. It would also be obvious to everyone how much extra out of their net earned income they do actually pay to the government!

Unfortunately, I don't think such clarity would be welcomed by the powers that be no matter what their political persuasion!

Hassle?

joro2801 | | Permalink

What is the hassle with on-line filing?

No worries about hold-ups in the post, up to the 7th of the month to enter the figures into a simple on-line form and money automatically taken on about the 10th (wasn't it the 12th before Santander got involved?) - although you can BACS it if you wish, to be received by the 7th.

vowlesj's picture

a bit of history

vowlesj | | Permalink

I always understood that the vat threshold was introduced because of the costs of compliance for small businesses - well that may have been the case in 1973 and pre-computerisation and the digital age but it is hardly an issue in today's digital world and especially with the flat rate scheme.

I personally agree with the various posters who have pointed out the unfairness of a high registration threshold and the impact it has on businesses who are close to the threshold.  I think we should follow the European route and make the registration threshold £10,000 or similar.

In fact, I would go further than that - I would say that if you are in business that you charge VAT - and make it a black and white issue. You register your new business with HMRC and go straight into the system of both direct and indirect tax.

(1) This would give every business, small, large or on the registration cusp, a level playing field.

(2) This might give HMRC cost and compliance issues, but surely it will also increase the VAT take sufficiently to make a difference to government finances.

(3) The black economy becomes harder to work in without detection and therefore this helps generally with HMRC's anti-avoidance.

 

I also like the previous suggestion of a £1000 carrot to register early...always better to support a start-up business than penalise it!

voluntary registration

david5541 | | Permalink

markgosling wrote:

I fully understand that the VAT threshold as it stands is a major problem for businesses that trade near the threshold. However I do not agree that all businesses should be registered for VAT.

The aim of governement is to make things simpler for the small business. I have many small life style clients with a turnover of under £20,000. Many would not survive if they had to pay VAT and pay me to file VAT returns. It would simply encourage the black market or some to go on the dole.

 

voluntary registration is still optional if your turnover is lower than 70k; but its a good displine for keeping business records, i have put my clients on to the opition of annual accounting then it fits in all round for you, the tax man and the  vat man.

governent has done nothing to make life simpler for small lifestyle clients they are always the most stressed... 

VAT Registration

JacquiMBurns | | Permalink

I am not sure why some responders are saying that the cost of registration will be over £10k. Registration also means that you CLAIM back VAT on purchases eg. of stock & business expenses. A lot of the individuals/ companies I have prepared VAT returns pay over very little VAT, especially in the early years when they can claim for most set-up costs. Also, hasn't any of you heard of the cash-accounting method? You only pay VAT over when you have actually received it from the client you charged it to thus it has a negative effect on your cash flow.

There is also an annual accounting scheme which is, again, very easy on small businesses.

As for filing online, this is a great BENEFIT for businesses & accountants. You get an extra 7 days to file + an extra 10 days (at least, if you set up DD arrangements) to pay. Incidentally, HMRC pay out reclaims quicker if filed online &, if they have details of your bank account, they pay it in directly so no faffing about with cheques! I can't see why the return should take longer if you file it online.