VAT: Learning from default surcharges
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.