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.
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.
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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.
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.
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Hi, I am a VAT Consultant, part of the team at vatadvice.org We are based in Cambridgeshire. We work largely with charities but also advise a range of commercial organisations.
I have over 30 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.