VAT: Learning from default surcharges

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Neil Warren highlights ten learning points from a failed VAT appeal against three default surcharges.

There’s a famous song from yesteryear with the opening line: “If there’s a wrong way to do a thing, nobody does it like me.”

That song could have been written for furniture maker Shane Brown (TC07189) in respect of his VAT affairs, and his appeal against three default surcharges for periods August 2015 to February 2016, which totalled £963.98.

All three surcharges related to late payments he had made by cheque. The appeal showed that his VAT procedures were full of holes.

Top ten learning points

To ensure that Brown’s doomed appeal is not wasted I am sharing my top ten VAT messages from the case.  

1) Don’t pay by cheque

Brown decided for periods 11/14 onwards that he would stop paying his VAT electronically and instead send a quarterly cheque payment to HMRC. This meant he lost the extra seven days you get for paying electronically (one month after the end of the period plus seven days). He also sent off the cheques late. Also, cheque payments are only acceptable if a business has an exemption from online filing of VAT returns, which he did not.

2) Pay by debit card

I’ve just googled “HMRC how to pay VAT” and a very helpful screen came up which enabled me to make a debit card payment online. There is the opportunity to pay by credit card as well, but this can only be a corporate and not a personal card.

3) Cash accounting scheme

In his appeal letter, Brown said that slow payments from his customers were a major factor for his late VAT payments. It would have made sense for him to join the cash accounting scheme, to delay his output tax payments until his customers had paid.

4) Annual accounting scheme

Brown obviously found the discipline of submitting quarterly returns and paying VAT very difficult. It might have made sense for him to consider the annual accounting scheme and the submission of only one VAT return a year.

5) One day late is still late

Brown was actually very lucky: his first three late VAT payments did not get a penalty because he received a surcharge liability notice for the first late period (November 2014) and then he escaped penalties for the next two periods (for which surcharges would have been 2% and 5% of the VAT due) because the surcharge was less than £400 on each occasion, and therefore waived. 

6) Lack of funds is not a reasonable excuse

Before taking the matter to tribunal, Brown should have taken professional advice. Any competent tax adviser would have told him that cash flow problems cannot be classed as a “reasonable excuse” for a late VAT payment.

7) Read correspondence from HMRC

Brown claimed not to have received correspondence from HMRC about his late payments and surcharges. To misquote Oscar Wilde: “To lose one letter from HMRC could be considered unfortunate, to lose two (or even seven) seems like carelessness.” If dealing with paperwork was not one of his skills, he should have forwarded it to an accountant or bookkeeper.

8) Request time to pay before tax is due

If you contact HMRC’s Business Payment Support Service (0845 303 1435) before the tax is due for payment and agree a time to pay deal in case of cash flow problems, there will be no default surcharges for the period in question.

9) Consider deregistration

Brown referred to decreasing turnover for his business. I wonder if he should have deregistered from VAT. The low amounts of surcharge certainly indicated that his standard-rated turnover was well below the annual threshold, but perhaps he had some zero-rated export sales.

10) Prioritise VAT returns and payments

For a business with only standard-rated sales and not much input tax to claim, VAT almost becomes a sales tax and a 15% surcharge is, therefore, a massive hit for any business to absorb. To make the situation worse, there is no income tax or corporation tax relief for surcharges incurred by a business.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

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17th Jul 2019 12:14

"If dealing with paperwork was not one of his skills, he should have forwarded it to an accountant or bookkeeper."

A laudable thought - and one which HMRC is increasingly trying to make hay with by insisting that it be made as difficult as possible for third-party book-keeper/accountant to easily deal with stuff - on top of it not being clear, to me at least, where 'proper records' should be engendered and retained under the hammer of 'personal responsibility'.
The chap is clearly a craftsman and in business as such to perform his craft and not a marionette of HMRC. As such I bet the delineation between his own records and his trading records are 3" of dusty desk visited only 'when necessary'.
This is just the type of guy HMRC's encroaching regime is designed to exploit for fines as proxy additional tax.

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By NH
to dgilmour51
18th Jul 2019 06:40

Just because someone is a craftsman and no good at doing the books, it does not give them carte blanche to ignore the rules and pay on time, if you are in business for yourself it is your responsibility to ensure your legal and tax obligations are complied with either using your own competence or hiring a professional, that is part and parcel of being in business for yourself, otherwise stay as an employee, I have no sympathy at all.

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18th Jul 2019 16:35

Is this an old article being republished? The case is dated February 2017 and the Business Payment Support Service looks out of date.

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to stepurhan
22nd Jul 2019 13:00

stepurhan wrote:

Is this an old article being republished? The case is dated February 2017 and the Business Payment Support Service looks out of date.

I spotted the "old" number straight away. HMRC switched to 0300 200 numbers at least a couple of years ago, and dialing the 0845 will no doubt require an increase in your mortgage to pay for it. The correct number is 0300 200 3835

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