IT’S CERTAINLY EASY for businesses who are not VAT registered to be caught out by HM Revenue & Customs (HMRC) VAT laws.
The VAT Initiative allows business owners who may have inadvertently missed out on paying VAT to have a reprieve – paying just 10% extra on top of the VAT owed, rather than the maximum 100% extra as a penalty charge.
This is regardless of by how much the business turnover has exceeded the £73,000 threshold, encouraging a full disclosure of revenue. However, as the 30 September deadline looms, many eligible businesses will still fail to register to pay their VAT, causing, in some situations, the business to go under.
This can only contribute to the FSB statistic that two in three start-ups will fail in their first year, of which poor accountancy knowledge and inefficient bookkeeping can sometimes be hidden causes. Yet there are a number of ways in which accountants can spot the typical pitfalls, and help their clients to become well equipped to cope with VAT laws.
Accountants and advisers face a variety of challenges as a result of the VAT initiative, not least because of the multitude of last minute calls from clients requesting help with calculating total business turnover. Advisory letters have been sent by HMRC to over 40,000 targeted businesses, many of whom will have little knowledge of how to keep on top of their finances themselves.
In addition, there are those business owners who have not received the letter and are unaware of the legislation. They may be over the VAT threshold, yet through lack of accountancy knowledge, risk losing out on the opportunity for the relatively minor 10% penalty. This haphazard bookkeeping is often the result of misplaced bank statements, lost receipts and poorly managed invoices.
Consequently, many will rely on their accountants to keep abreast of these opportunities for them and ultimately save the business money.
Other problems will arise for businesses whose turnover lies very close to £73,000 per annum. For those who straddle the line in terms of qualifying to pay VAT, the process can be particularly trying, and they may find themselves heavily penalised for just small infringements of the law.
Accountants need to encourage clients to review their business turnover on a monthly basis, as the requirement to register is based on a twelve month rolling period. These clients will also need to consider whether they should have registered in previous years, especially if the economic downturn has meant that the business was trading above the VAT threshold but has since dropped below the deregistration amount.
These companies should be aware that the threshold changes every tax year, with the consequence that those trading at just £60,000 between 2005 and 2006 could incur penalties.
Accountants will also have to keep an eye on whether their clients run multiple businesses concurrently. Often, business owners mistakenly believe that separation of business activities will allow them to avoid VAT, without keeping their accountants abreast of these other business operations.
HMRC cites the typical example of a bed and breakfast owner artificially separating the bed and breakfast aspects of their trade, attributing them to two different companies. In such instances the sales in all the businesses should be added together to determine whether or not VAT is payable, unless each business is a separate legal entity.
Through developing a strong working relationship with clients, accountants can ensure that they have knowledge of all the relevant businesses their clients may run, enabling them to offer tailored and appropriate advice.
It is clear that keeping on top of the books is the easiest and most efficient way of avoiding these penalties.
Accountants cannot be present at all times, so need to recommend simple financial software for clients to use on a day-to-day basis, helping them to identify these opportunities themselves. A lot has been said lately about the big bad taxman coming to pounce on small businesses, but the VAT deadline is not new and HMRC must act where there is a necessary and serious need to improve record keeping.
At the end of the day, efficient bookkeeping can help business owners spot potential problems early, so there can only be good, not harm, in getting the books in shape.
Not only will this keep small businesses legally compliant and avoid unnecessary fines, but more importantly, it will help clients to run their businesses successfully and profitably in the future.
Diana is a payroll and compliance expert with over 20 years experience in payroll systems and processes, at Intuit UK
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