The 50th anniversary of the UK’s introduction of VAT was earlier this year, but despite being around for a while, many VAT-registered businesses still find VAT too complex and confusing. No surprise then that more businesses than ever are getting hit with penalties for inaccuracies.
Inflation and frozen thresholds
Two things that are not helping are the high rate of inflation combined with a freeze on various VAT thresholds.
Since 2017, the registration threshold has been £85,000, so with increased prices it is easy for a business to become liable for VAT despite staying the same size.
Meanwhile the thresholds for remaining within the flat rate, cash accounting and annual accounting schemes, have remained virtually unchanged for around 15 years, so, again, it is easy to mistakenly continue with a scheme when no longer eligible to do so.
Beware penalties
With HMRC aiming to close the tax gap for VAT, the risk of penalties for inaccuracies will only increase; for 2021/22, the number of penalties issued was already substantially higher than for the previous year, a trend which is sure to continue.
HMRC is able to charge a penalty of up to 30% of the extra VAT due if an error arises due to lack of reasonable care.
In HMRC’s view, it is reasonable to expect a business to find out about the correct VAT treatment or to seek appropriate advice when encountering a transaction with which they are not familiar.
A get out of jail card?
Incurring such a penalty is somewhat careless. However, there may be a get out of jail option if this arises.
HMRC have the discretion to suspend a penalty, for period of up to two years, during which time a business must comply with certain conditions. The aim is to prevent further penalties in the future, so a business could, for example, be asked to improve its record keeping.
If this is done, the penalty will be cancelled at the end of the suspension period, but best to avoid such a scenario in the first place.
HMRC’s guidance on VAT errors can be found here.
Related Articles
Intestacy entitlement increased
West London
3 Brook Business Centre,
Cowley Mill Road,
Uxbridge, UB8 2FX
East London
London, E11 1GA
South London
London Bridge
73–81 Southwark Bridge Road,
London, SE1 0NQ
City London
London, EC2M 1JH
We believe we are more than just your average accountancy firm. Our goal at Barnes Roffe is to engage our clients through a proactive relationship, which provides you with the resources and tools you need to enable you to take charge of your finances with confidence.
Tax news, audit news and any new accounting news ... with the help of our topical tips, blogs and key guides you can enjoy the benefit of being regularly informed of business and accounting updates which are likely to be relevant to you and your business.
PLEASE NOTE: By the very nature of this type of information the details of tax law might have changed since they were published, so contact your Barnes Roffe partner before acting on any matter contained in these documents.