Value Added Tax

If either the VAT return or the VAT payment is late, this is called a “default”. Your first default may result in just a warning, but you should take this very seriously because one remedy in the long term, if you give credit, may be to adopt the Cash Accounting Scheme, and you cannot adopt this scheme unless all your returns are up to date and you have either paid up or reached an arrangement. Ask your accountant for further advice and act sooner rather than later so you don’t get caught up in a circular argument.

If you let your customers take credit, then you may also need to give some thought to debt collection. Click here for a basic introduction to this topic.

Many businesses prepare and submit their own VAT returns, but other businesses get their accountants to do it for them. The return needs to be submitted electronically. The payment must also be made electronically and must be cleared through to HM Revenue & Custom’s bank account by the 7th of the month. In practice, the end of the previous month is the time to remember to get the VAT return submitted, and payment may follow finalisation of the return.

Should you be unable to pay the VAT, make sure that the return is submitted anyway. Otherwise HMR&C may make a VAT assessment of how much tax they think you should pay them, and you won’t want this as a complication. HMR&C will take the view that you’ve made the sale, got the cash in, and now you should forward their share of it. If in fact you have a substantial bad debt or many slow payers among your debtors, then it is time for a discussion with your accountant.

The first default you get effectively puts you “on report” for the next twelve months. If you have a second default then you will be surcharged 2% of the tax that is due. A third default results in a 5% surcharge , a fourth default is a 10% surcharge, and a fifth default is a 15% surcharge. With each new default, you stay “on report” for another twelve months. The minimum surcharge is £30, but small surcharges may not be imposed.

The general trend with both surcharges and assessments (when no return is submitted) is that they can look mild at first, but they get nasty later and you are living in a fool’s paradise if you do not take some action to ensure that your future VAT returns are submitted on time and VAT is paid up by the due date.

If we may be allowed a mention, the software in use by David Porthouse & Co ensures that as the VAT returns are prepared, useful work is also being done towards preparing the annual accounts, without duplication of effort, and the benefit is passed back to you. It therefore makes sense to let us do everything. You may wish to do your own VAT returns to save fees, but you are competing with a lot of advanced technology if you do.

If you let us do your return, we will also work out the average VAT fraction or VAT rate you are paying and advise you if it is worth switching to the Flat Rate Scheme. You may read more about this Scheme by clicking here.