VAT flat rate scheme and bad debts

If you use the flat rate cash-based turnover scheme you may still be due a VAT reclaim even though you will not have paid a VAT contribution to HMRC.

Section 14 of the VAT Notice 733 spells it out:

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&id=HMCE_CL_000345&propertyType=document#P633_59475

The following is extracted from HMRCs notice:

If you use the cash turnover method of accounting you may be eligible for bad debt relief if:

  • you have not been paid by your customer and it has been six months since you made the supplies
  • you have not accounted for and paid tax on the supply
  • you have written off the debt in your accounts.

If you meet all these conditions, your claim will be for the difference between the VAT you charged to your customer and the amount you would have declared to us had you been paid. As with businesses that use the basic and retailer’s methods, this is because your flat rate takes account of input tax that you would otherwise have been entitled to, if you had been paid by your customer.

You can make the adjustment as follows:

  1. Identify the VAT in the unpaid supply – eg Total price = £1,200
    VAT= £200
  2. Calculate the VAT that would have been paid under the flat rate scheme if your customer had paid you – £1,200 × (say) 12% = £144. That is the total owed (including VAT) multiplied by your flat rate scheme percentage.
  3. Subtract the sum of step 2 from the sum of step 1 – £200-£144 = £56
  4. Step 3 is your special allowance under the flat rate scheme. Include it in your VAT account in your next return.

Note: if you apply for bad debt relief on a supply made while using the FRS you should make the adjustment as above, even if you have withdrawn from the scheme.

VAT flat rate and cash schemes

Two of the VAT special schemes can provide particular advantages for smaller businesses.

  • The Flat Rate Scheme (reviewed in our June 2012 newsletter) can reduce overall VAT payable, especially for traders that are subject to the lower Flat Rate percentages.
  • Cash Accounting allows you to defer payment of VAT added to your sales until the invoices are paid. This can have significant cash flow benefits for businesses with amounts owed from customers that are higher than amounts due to suppliers.

In order to register for either of these schemes, your projected business turnover for the year following registration needs to be below certain limits.

  • Under the Flat Rate Scheme rules you can register as long as your projected turnover for the next twelve months does not exceed £150,000 excluding VAT.
  • The equivalent turnover limit to join the Cash Accounting Scheme is £1.35m.

Once you are in the scheme you can continue to enjoy the benefits until your turnover exceeds the exit turnover limits. For both of these schemes these turnover limits are higher than the amounts required for registration.

  • You will need to leave the Flat Rate Scheme when your annual turnover exceeds £230,000 excluding VAT.
  • The equivalent amount to leave the Cash Accounting scheme is £1.6m.

Planning note

From a planning point of view it is therefore wise to consider registration for these schemes when a smaller business commences trading or shortly thereafter, when turnover limits will be at their lowest levels in most cases.

The Flat Rate rules allow you to stay in the scheme and exceed the turnover registration limits by £80,000 before you need to exit.

Charities and VAT

Charities only need to account for VAT on those parts of its activities that are within the scope of VAT. A quick checklist follows:

* Sale of donated goods from a charity shop – zero rated supply
* Investment income, bank interest etc – outside the scope of VAT
* Donations from general public – outside the scope of VAT
* Fundraising events – exempt from VAT
* Grants, see below

The VAT status of the charity shops is advantageous. Even if the zero rated sales are below the current registration limit of £73,000, it would be worthwhile registering the trade voluntarily as any associated costs that include VAT can be reclaimed.

Grants received

Although most grants received by a charity are outside the scope of VAT, occasionally grant providers will require the charity to provide services to individuals or groups as a direct condition of grants made. If this is the case the grant is a standard rated transaction. In most cases this will not cause difficulties as most grant providers are Local Authorities that are VAT registered and can claim back any VAT charged.

Nevertheless charities should take care to seek advice and ensure that they charge VAT on grant income when appropriate.

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VAT on salary sacrifice schemes

Due to a recent European Court of Justice ruling, HMRC now consider that the provision of a benefit via salary sacrifice to employees constitutes a supply of services for consideration and is therefore subject to VAT.

Benefits that will be affected include:

* Cycle to work schemes.
* Face value vouchers.
* Childcare vouchers.
* Food and catering provided by employers.

To give employers time to make the necessary changes to their record keeping HMRC will not require output tax to be accounted for on salary sacrifice supplies until 1 January 2012.

HMRC announce VAT disclosure opportunity

H M Revenue & Customs (HMRC) is launching a new disclosure opportunity, this time aimed specifically at businesses evading VAT.

The initiative is aimed at businesses not registered for VAT but who are in fact been trading above the turnover threshold, currently £73,000 in a 12 month period.

In a similar vain to previous facilities, beneficial terms are on offer. HMRC states that most (but interestingly, not all) businesses making a full disclosure of under-declared VAT will pay a lower than normal penalty rate of 10% in addition to the tax and interest. Businesses must notify their intention to disclose by 30 September 2011 and then actually make a full disclosure and pay the additional liabilities, including the penalty, by 31 December 2011.

HMRC, in time-honoured fashion, has promised to begin investigating those who fail to come forward after the initial deadline passes on 30 September 2011, where it suspects evasion.

The announcement also promises to look favourably on the disclosure of other taxes associated with the trade, citing lower than normal, albeit unspecified, levels of penalties.

Paying VAT and new penalties

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From 1 April 2010 all VAT payments made by cheque will be treated as being paid on the day the cleared funds reach the Taxman’s account. Previously the VAT was treated as being paid on the working day the cheque reached the VAT Office. A cheque will normally take at least three working days to clear. Where VAT payment is received late more than once in 12 months you may have to pay a default surcharge (a penalty).

The Taxman will exercise his discretion not to charge a default surcharge for VAT periods that commenced before 1 April 2010, where the paper VAT form and the cheque payment are both received on time. VAT cheque payments for periods that begin on and after 1 April 2010 will have to clear the Taxman’s bank account by the due date, or surcharges may apply.

Where the VAT return is submitted online the payment for any VAT due must also be made online. However this can cause problems where the VAT due for the quarter exceeds £10,000.

Many banks impose a daily limit of £10,000 for electronic payments for both business and personal accounts. Larger electronic payments can be made by CHAPs but this may involve bank charges of up to £35 per transaction. You need to check with your bank in advance about the best way to pay a large VAT bill electronically.

If your business is not already VAT registered but your sales are edging up towards the VAT compulsory registration threshold, (£70,000 from 1 April 2010), you need to be particularly careful about when you register. From 1 April 2010 there is a new set of penalties for failing to register for VAT on time. The penalty is based on the underpaid VAT. The minimum penalty will be 10% of the VAT due, and the maximum penalty 100%. The highest penalty will be charged where there has been deliberate concealment of the need to register for VAT.

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Filing VAT online

You might have received a letter from the VATman that officially notifies your company or business to file its VAT return online, or face penalties.

If your business had a turnover of £100,000 or more in the year ending 31 December 2009 you are legally required to file your VAT returns online, rather than as a paper form, for all periods beginning on or after 1 April 2010. So you can file your VAT return for the quarter to 31 March 2010 on paper, but VAT returns for later periods must be submitted online.

Our online accounting software makes online filing of your VAT return very easy.

If you don’t agree that your turnover was £100,000 or more in the year to 31 December 2009, you need appeal against the VATman’s decision within 30 days of the date of his letter. The VATman has not sent a copy of his letter to us, so please forward it on if you have concerns about this turnover threshold. If you want us to submit your VAT returns online on your behalf we will need that letter as it contains some key details for the registration process.

Even if you have already filed several of your VAT returns online, and your turnover is over £100,000, you will still receive the notification letter from the VATman, including the expensive glossy brochure. If your turnover is currently less than £100,000 per year, you will not have to file your VAT returns online until 2011. The Government has announced that all VAT registered businesses will be required to file their VAT returns online from April 2011, but that requirement is not law yet.

If your business first registers for VAT on or after 1 April 2010 you will be required to file all your VAT returns online from your first VAT return, even if your turnover is way below the £100,000 threshold.

We can assist with online filing of VAT returns.  From simply submitting the return to a full outsourced bookkeeping function.  Please contact us for more details.

VAT number verification

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The European Commission have enhanced their on-line service which allows taxpayers to check if the VAT number given to them by a potential supplier or customer is valid.

The on-line service has been updated to allow taxpayers to obtain a certificate to prove that they checked that a VAT registration number was valid at a given time and date.  This system has been designed primarily to protect taxpayers who become innocently involved in a chain of fraudulent transactions such as carousel fraud.

The certificate will provide valuable evidence for a taxpayer to prove that they acted in good faith should HMRC challenge input tax recovery or seek payment of lost VAT.

The new on-line system will also be useful to businesses who zero-rate sales to businesses in other EU countries.  Specifically in meeting one of the conditions for zero-rating which states that your customer must be VAT registered.

The on-line service is available at the following address:

http://ec.europa.eu/taxation_customs/vies/vieshome.do?selectedLanguage=EN

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Backdated claims for VAT refunds

You may have in the past overpaid VAT output tax or underclaimed VAT input tax, and this might date back many years. Now is the time to claim the overpayment back from H M Revenue & Customs.

– Claims can be back dated to April 1973, or the date of your VAT registration if later.
– But the deadline for submitting a claim is the end of this month, 31 March 2009.

It is possible to base a claim on a reasonable and valid estimate if the underlying records no longer exist. Claims can include a request for interest.

The following list includes items for a possible claim:

* Mileage costs paid to employees
* Staff expenses
* Subsistence
* Recovery of VAT on imports

If you are at all unsure about VAT that has been added to particular supplies you have made, or whether VAT should have been recovered on certain costs, please call.

Housebuilders Renting Property

Many building firms are now holding completed residential property which is proving difficult to sell in the current property market. One solution is to rent out this property for a short period in the expectation that property prices will recover.

Ordinarily most of the VAT paid on construction costs is recoverable. Unfortunately rents received from the letting of residential property are an exempt supply for VAT purposes.

So potential problem, a builder who both constructs and lets residential property is considered to be a “Partially Exempt” trader. Potentially a proportion of the VAT recovered on the construction work may have to be paid back!

The builder may have to:

. adjust the VAT recovered on his submitted VAT returns

. restrict the VAT to be recovered on current and future VAT returns

. or both
Contact us for advice. For instance if the amount of input tax which can be attributed to the exempt rental income is below a defined “de minimis” amount, no adjustment to past or future returns is required – VAT input tax can be recovered in full.

Provided the exempt input tax is below:

. £625 per month, on average, up to £7,500 per year; and

. is not more than half of total input tax ,

then the exempt input tax is de minimis and recoverable in full.

If you are a house builder, and considering the rental of residential building stock, do contact us at an early stage so we can help you through the partial exemption calculations which are tedious and complex.