Remember to check your turnover every month if you are close to the VAT registration limit…

Why?

I had a phone call yesterday from a tax adviser. They had a client who had gone over the registration limit, albeit briefly, three years ago. The client decided to take no action as they expected their turnover to fall below the registration limit during the following year.

What they overlooked is that there is a requirement to notify HM Revenue & Customs (HMRC) that they had exceeded the VAT registration limit within 30 days. Because they took no action they left themselves open to a penalty for failing to notify HMRC that they’d exceeded the VAT registration limit.

HMRC intervene

As it happens, HMRC did notice the failure to notify when they were reviewing the business’s tax returns. This is one of the downsides for the taxpayer of the merger five years ago of Customs & Excise and the Inland Revenue.

As a result of this, HMRC have compulsorily VAT registered the business, and are now seeking back tax and a penalty.

The worst thing is that this was completely avoidable, and there would have been no back tax to pay. Had the business notified HMRC in time it could also have applied for exemption from VAT registration on the basis that it expected its turnover in the next 12 months to be below the VAT registration limit.

How to avoid this happening to you

You can avoid this penalty trap by keeping track of your taxable turnover at the end of every month for the past twelve months. As soon as you see that you have exceeded the VAT registration limit you have to notify HMRC. If you expect your turnover in the following 12 months to fall below the registration limit you can apply for exemption from VAT when you notify HMRC.

If you find yourself in this position and need help, ask your accountant, bookkeeper or a VAT specialist.

If you have any questions or comments on this I’d love to hear from you – use the comments section below.

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Sorry, this is a little bit technical and is aimed fairly and squarely at those that run theatres. The intention is to help you overcome the apparent blindness of HMRC to the link that exists between production costs and income generated by the theatre from the sales of programmes, etc.

This only affects theatres that qualify for exemption from VAT on admission charges. Such venues have both taxable and exempt income and are thus said to be partly exempt. This means that they have to restrict the VAT they recover on costs to that which relates to taxable activities.

HMRC have published a Revenue & Customs Brief, 62/09 VAT: Partial Exemption – VAT deduction by theatres on production costs, which sets out their ‘revised policy’ following the VAT Tribunal decision in the case of Garsington Opera.

In the Revenue & Customs Brief HMRC state that production costs will only become partly recoverable if there is a firm intention to make taxable as well as exempt supplies when the costs are incurred. Later in the Revenue & Customs Brief HMRC say the intention must be a genuine intention, not an aspiration or hope.

What do you have to do to create the direct and immediate link between the sale of programmes and the production costs? You have to show that you had an intention of selling programmes at the shows (even though this is the only time that programmes are usually sold, and a direct and immediate link seems to be there anyway) at the planning stage. To do this you need to add the programme production to the list of things to do when planning a production, and include in your decision making process a note that it is the theatre’s intention to raise money from sales of the programme at the time of allowing public admission to the production.

Other items that you might want to include in your planning are additional purchases of goods to be sold in the theatre, extra staff being employed to man selling points of memorabilia, etc. should all create a direct and immediate link to the production costs.

And remember to make sure that your fund-raising team seek sponsorship for particular productions, or production runs, as highlighted in the Revenue & Customs Brief to create a direct and immediate link between the production costs and the sponsorship.

HMRC, however, appear to take a different view but don’t appear to be able to put together a fully reasoned argument as to why it is so much easier to show a direct and immediate link to the exempt activity (admission charges) and yet so difficult to show one to taxable activities (e.g. programme sales).

I cannot guarantee that you won’t have trouble with HMRC when they review your partial exemption position if you follow the suggestions in this article. What I would expect though is that if you take your case to the VAT Tribunal, and beyond if necessary, the decision will be that there is a direct and immediate link.

Now for the trite comment: every case is different, so you must seek advice on how to deal with this for your organisation from a professional VAT adviser.

If you have any questions about this issue, or wish to make your own comments please use the facility below. I look forward to hearing from you.

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Bought ledger

If you aren’t using Cash Accounting, you can gain a cash flow advantage by claiming VAT on invoices you have received that are dated in the VAT period of the VAT return you are submitting. Of course, this doesn’t include invoices on which you’ve already claimed the VAT.

Cash Accounting

This provides a benefit for you if your annual turnover is up to £1,350,000, and which invoice most of the supplies they make. Under this scheme VAT is payable when the invoice is paid. VAT on purchases can only be recovered when they are paid.

Cash Accounting for large businesses

If you supply services and you do not qualify to use Cash Accounting, you may be able to make use of the rules which allow for VAT to be accounted for when payment is made. To achieve this, you do not issue an invoice for payment, but a “request for payment.” Certain conditions need to be met, but the saving in overdraft interest arising from this can be significant. This option does allow you to recover VAT on receipt of invoices rather than payment.

Duty deferment

Provided you are using the duty deferment system to pay import duty & VAT, you could gain a cash flow benefit by importing goods in the last month of the VAT period. This would reduce the time lag between paying the VAT on the importation and claiming it back on the VAT return.

Monthly returns

Monthly returns can be useful were you are likely to be incurring large amounts of input tax, but only paying relatively little output tax.

Avoid penalties

Penalties are bad for cash flow! Any penalties your business suffers are not allowable against tax, so come straight out of your profits.

You should, as far as possible, ensure that the VAT principles and procedures your business follows minimise the possibility for penalties and interest to be charged by H M Revenue & Customs. The first line of defence should be to ensure that your VAT returns are submitted on time, as this avoids a possible default surcharge, which can be as much as 15% of the VAT owed to H M Revenue & Customs.

Conclusion

You can improve your cash flow by ensuring you take advantage of the VAT rules as they are. There is no need for fancy schemes, which will usually be attacked by H M Revenue & Customs at some point.

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I’ve been asked by a client how they should account for VAT on deposits they take.

When a deposit is received for a future supply of goods or services, you have to account for VAT at the appropriate rate, i.e. 0%, 5% or 15%. It might be your standard practice to take a deposit to cover the cost of obtaining materials needed to carry out the work, or where your customer has not been granted credit facilities.

For example: if you quote a fee for work to be carried out of, say, £2,000 plus VAT, and requests a deposit of 25%, here’s how you would account for VAT?

First, the simple approach: ask for the deposit in a letter or using a pro-forma invoice. Neither require any VAT to be accounted for until the deposit is received, at which time you raise a VAT invoice so that your customer can recover the input VAT.

Second, you raise an invoice, and account for VAT on it in the normal way.

What if your customer doesn’t pay?
You claim back the VAT from the VAT office on your VAT return under Bad Debt Relief rules. Unfortunately this means you don’t get the VAT back until the debt is six months old, counting from the date payment is due. If you are offering 30 days credit on your invoice you will have to wait seven months from the date of issue to claim bad debt relief.

Using Cash Accounting would bring with it automatic bad debt relief.

Invoices

How do you invoice for the deposit, and subsequent supply? This is relatively straightforward, but causes some confusion as some may expect it to be complicated. The deposit invoice would have the following information on it, in addition to the usual invoice information:

The final invoice would then have this information shown on it:

The total VAT accounted for in this way is £300, which is 15% of £2000.

Beware! When considering asking for deposits remember to mention that VAT will be added to them. If VAT isn’t added to the deposit, the above example would look like this:

The final invoice would then have this information shown on it:

This still results in you receiving a total of £2,000, and accounting for VAT of £300, but the deposit received was nearly 22%, rather than 25% wanted.

If you operate cash accounting you avoid the bad debt relief problem. More information on the cash accounting scheme will be posted soon.

If you have been, thank you for reading.

Any questions? Comments? Please leave them below. Thank you.

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At a recent meeting HMRC told the attendees that there were four common omissions that lead to applications for VAT registration to be delayed. Before I tell you about these omissions, so you know what to make sure you get right, let me just mention something else that HMRC told the meeting.

Apparently, some applications for VAT registration are being sent in on out of date application forms. These forms will be dated before November 2006. You can find the date on the printed form near the bottom. The latest forms are in the current green print with HMRC 11/06 in the bottom left of page one. Please make sure you are using the latest form. You can download a copy from HMRC’s website, and also find a copy of the guidance notes for the application form there too.

The omissions
The four omissions are:

• No telephone number;
• No turnover figure;
• Not filling the capacity in which signed box.
• Bank details

In the guidance notes that HMRC issue they make it clear that an applicant has to provide details of a UK bank account. Only businesses that are based abroad are likely be allowed to provide details for a foreign bank account. If you are in the process of setting up a bank account HMRC want to see evidence to support this.

The benefit of making sure that HMRC have up to date details of your business bank account is that repayments of VAT due to you will be paid directly into that account saving you the trouble of making a trip to the bank to pay in a cheque.

Telephone number
HMRC said that not putting a telephone number on the form is another common omission. HMRC doesn’t have any comment on providing a telephone number in the guidance notes. It would probably be wise to provide a land-line number, as HMRC can check that this exists and is allocated to the business, or in the case of sole traders is their number, even if it is a home phone rather than a business phone. Providing a mobile number is useful as this allows them to contact you should you be away from your office. HMRC contacted me on my mobile shortly after I had registered for VAT, so it is worth providing it.

Turnover figure
In boxes 19 through 21 it is necessary to provide details of your expected turnover in various categories. Yet again HMRC clearly think that the information on the form is clear as they provide no guidance on this point. So let me try to fill in the gaps:
Box 19: estimate of your expected taxable turnover in the next 12 months. This is what it says, an estimate. Taxable turnover is the turnover you expect to be charging VAT on at one of the so called positive rates, i.e. zero-rate, reduced-rate, or standard rate – currently 0%, 5% and 15% respectively.
It really does only require an estimate here. No one is going to hold you to it, but it would be a good idea to base it on any business plan figures you have, or on your expected growth in income in the coming 12 months.
Box 20: do you expect to make exempt supplies? It is important to know whether you will be making supplies that are exempt from VAT rather than zero-rated supplies. There is a big difference in impact on how much input VAT – the VAT you pay your suppliers – you might be able to get back. If you are going to be making exempt supplies you should seek help from a professional adviser as you may need a partial exemption method to help work out how much input tax you can recover.
Box 21: buying goods from and selling goods other EU member States. If you will be buying goods from other EU member states you need to put in the first box an estimate of the value of the purchases. In the second box an estimate of the value of your sales to customers in other EU member states.
This latter category must mean to business customers because sales to consumers will be subject to UK VAT at the appropriate rate, at least initially. I intend to ask HMRC for a comment on this because the lack of guidance on this part of the form must be causing difficulties for many applicants. I’ll let you know the outcome of my enquiry.

Capacity in which signed
Again there is no guidance on this point. It would probably be as well for the signatory to be one of the following, depending on the type of business:

• Sole proprietor;
• Partner;
• Director;
• Trustee;
• Company Secretary.

HMRC are unlikely to accept the form being signed by an employee or other agent.
One way around this is for the application for VAT registration to be made online.

Online applications
Using the online application system has one great benefit: it won’t let you submit the form until you have filled it in with data in a format that is acceptable. Doesn’t mean the data is necessarily correct, but it has to fit within the parameters set down by HMRC. Generally, an application submitted this way is likely to be dealt with quite quickly. I strongly recommend that you use this method of applying for VAT registration, rather than filling in and submitting the paper form.

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Sorry, not a very exciting topic, but I’ve had a couple of phone calls recently from people who wanted to know how to work out the CO2 figure for a vehicle for which this information has not been published, usually because the vehicle was made before the manufacturers started to provide the data. The guidance in HMRC’s Notice 700/64: Motoring Expenses says:

For vehicles which do not have a CO2 emissions figure, you should identify the CO2 band based on engine size, as follows:

if its cylinder capacity is 1,400 cubic centimetres or less, use CO2 band 140 or below

if its cylinder capacity exceeds 1,400 cubic centimetres but does not exceed 2,000 cubic centimetres, use CO2 band 175

if its cylinder capacity exceeds 2,000 cubic centimetres, use CO2 band 240 or above.

I hope that clears up the confusion in this area.

With thanks to the callers who prompted this post.

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HMRC have just announced that they have extended the clearance service they gave to large businesses to all businesses. This means that VAT registered businesses can obtain a ruling on a transaction in advance so that they know what the correct VAT treatment should be, and will help them avoid VAT errors.

How long to get an answer?

HMRC have said they will attempt to provide clearances within 28 calendar days.

This time limit is referred to differently in the two documents that HMRC have issued. The initial note says:

respond within 28 calendar days, as the norm

Whilst the main paper says:

within 28 days as the norm

This difference is important as if they mean 28 calendar days, that’s a mere four weeks. So, for example, if you wrote today, 1 April, you could expect to get an answer by the end of April or early May. On the other hand, if they mean 28 working days, the answer could be expected to arrive mid to late May.

HMRC have been asked to clarify the point, and make both pages read the same way.

How to get a clearance

The paper goes into how to get a clearance and what has to be provided.

One thing is clear: there has to be a material uncertainty of commercial significance to the business itself which will be determined by reference to the scale of the business and the impact of the issue upon it.

This is rather different to the old rules for VAT. Now it is clear that if the impact of getting the VAT wrong on a particular transaction or series of transactions would have a significant impact upon the business it is acceptable for the business to seek a clearance as to the correct VAT treatment.

If you want to see the papers issued by HMRC they are available on its website. The first paper can be found here, and the second here.

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I was recently sent a copy of a publication that purports to contain useful advice on tax. Included in the publication was a page on the powers of a VAT inspector. Sadly the advice given is woefully inaccurate.

Some of the information in the article is fine. I am concerned though that anyone following the advice that a VAT inspector has no right of entry to premises to inspect records, so can be legitimately refused entry may find themselves on the wrong end of a charge of obstructing an officer of Revenue & Customs. An officer of Revenue & Customs has the power to demand the production of documents at the principal place of business and at “such time as the authorised person may reasonably require.” Now you could argue that this power doesn’t allow an inspector to demand entry.

Let’s deal with that issue. In Paragraph 10 of Schedule 11 of the VAT Act 1994 the officer of Revenue & Customs has “… for the purposes of exercising any powers under this Act … may at any reasonable time enter premises used in connection with the carrying on of a business.”

It’s quite clear that an officer of Revenue & Customs has the power to enter any business premises and inspect records at any reasonable time and not at any other. What’s a reasonable time? During business hours would probably be the best answer. There could be times when, depending on the business, that certain times of the day would not be reasonable even when the premises are open for business. Lunch time in a restaurant springs to mind. Any reasonable officer would probably be prepared to wait until the activity died down before carrying out their work.

One other point that the article I referred to at the start says is that unannounced visits are not within the authority of H M Revenue & Customs. Give the powers quoted above its quite clear that this advice is also probably incorrect. An officer of Revenue & Customs doesn’t have to make an appointment, but if they turn up at 10pm that’s not a reasonable time for most businesses or business people. If they turn up at 10am and you have little choice but to let them in or risk the obstruction charge.

What if they do turn up unannounced and they are overbearing and intimidating? Phone your VAT adviser for guidance, or ask to phone their boss. Yes they do have powers, but you have the right to question their use of those powers.

Before I close I do have to say that the article does contain some good advice – just not enough of it in my opinion – and that is that you don’t have to answer questions put to you immediately. You can make it clear that you will provide an answer, but only after taking the time to check your facts.

Now, should I write to the publisher and tell them what I think?

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I had a call yesterday from a doctor asking about registering for VAT. The doctor said the GMC had advised that doctors that provide medical reports should register for VAT. Now, this is probably a rather simplistic statement of the advice given, but is all I have to work on – a check on the GMC website didn’t find anything to help me determine what they might have said. Having told the doctor what they needed to know I began to wonder how many other doctors are considering being VAT registered without realising the impact it could have upon the business records.

I don’t want to go into the intricasies of what doctor’s do that is liable to VAT at what rate – that’d take far to long and you’d fall asleep before you’d got much further than this! Suffice to say that thanks to a recent case that went to the European Court of Justice HMRC have made changes to what can be exempt and what has to have VAT added.

So, what’s the big difficulty? It’s not so big, but one needs to be aware of all the pros and cons of being VAT registered. Just because one makes a few supplies that would be liable to VAT if VAT registered doesn’t mean that you have to be. It might, of course, suit the person involved to be registered – perhaps they’ll be able to recover more VAT than they’ll be collecting, which means that HMRC would pay them to do it! Nice work if you can get it.

In this case, the person asking is a doctor and many of his supplies are likely to be exempt from VAT. This adds complexity to accounting for VAT. Does the doctor want that complexity? Particularly if they’re turnover for the services that are liable to VAT is less than the registration limit – currently £64,000 per year.

Registration is easy if you can fill in the form, and are patient. But are you ready for the accounting requirements once you’ve joined the club?

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