VAT can never form a direct cost to a business or company. Indeed, for some businesses, their VAT registration makes the cost of sales less expensive, as they can reclaim the VAT charged to them on purchases.
- where your company or business reaches a certain income threshold, registration for VAT is compulsory;
- before that threshold is met, for very low turnover companies and businesses, the burden of VAT registration, collection and payment is not required (although it remains an option for those intending to only reclaim VAT on purchases).
Where you are VAT registered, there is a requirement to file regular returns (most commonly on a quarterly basis) and account to HMRC for all VAT chargeable on turnover and purchase costs for that period. This return should provide a net sum of VAT which is either payable to HMRC or reclaimable from HMRC.
HMRC and VAT losses
The VAT process is relatively straightforward but faces a number of risks and we find that in almost all insolvent situations a company will have large VAT arrears.
- the immediate difficulty is that VAT is payable after the event and, as a result of low cash-flow, bad debts or high costs absorbing all available cash resources, there may be insufficient funds available to meet this liability
- in summary, where a company or business is struggling, it is not unusual for the net VAT collected from customers (and which is payable to HMRC) is instead used to enable the company to continue trading rather than being immediately paid to HMRC.
In some situations, these problems can be alleviated by seeking accounting advice and either cash accounting or entering into the VAT flat rate scheme.
However, it is when the VAT system is subject to either reckless financial management or fraud that risks arise to HMRC.
The most common type of VAT fraud in recent years is the missing trader intra-community fraud, or “Carousal Fraud”, a simple explanation of which is that it uses the lack of EU trade barriers (as of writing) to enables good to be circulated within the EU with the paying company reclaiming VAT and the receiving company not accounting for VAT (and usually being placed into liquidation).
In such circumstances the paying company has been used to defraud the tax authorities of sums it was never going to collect from the seller.
Notice of requirement
Where a director or individual has had previous company failures with VAT losses and HMRC suspect this failure to account may be repeated, then HMRC may issue a notice of requirement.
A notice of requirement will be served on the company care of it’s directors.
- a notice of requirement will state a fixed sum required to be paid as security for future VAT obligations;
- this security is calculated on the basis of current estimated earnings and on the basis of the arrears due from the predecessor company, often meaning that the VAT security required is very large and is often on the basis of a much higher level of trading by the predecessor company or business.
This security is held for a minimum of between 12-24 months (dependent on the regularity of your VAT returns) and, once HMRC considers there is no ongoing risk, will be returned.
Consequence of failure to comply with a notice of requirement
In the event you do not respond to the notice of requirement, and/or do not pay the amount required as security, then HMRC may institute prosecution proceedings against the directors.
The prosecution may lead to a fine of £5,000 (under the tax legislation as of writing) for “each taxable supply” meaning that this could be for every VAT invoice issued.
At all times we would recommend engagement with HMRC to discuss such issues as soon as possible and upon receipt of any warning letter received.
At Francis Wilks & Jones we have comprehensive experience of conducting negotiations with HMRC to either seek a reduction of the security sum sought or alternative arrangements. We are also able to assist with any claims arising from non-payment of any HMRC liabilities, including director disqualification claims or claims out of insolvency for breaches of a director’s fiduciary duties.