As mentioned above, there are penalties you could face if you do not stay on top of your VAT returns. We will aim to outline the potential consequences, with options for those already struggling.
Tax arrears penalties
Preparing VAT returns is critical to the longevity of your business, particularly if you fall into tax arrears and do not have the resources to pay the fines. The deadline for VAT returns is one calendar month, and seven days after the accounting period. Without a good excuse VAT returns must now be filed online via the HMRC portal. While HMRC may offer ‘grace’ for companies if it is their first late payment within 12 months, you will still, likely, receive substantial fines.
While smaller businesses – those with a turnover of less than £150,000 – do face tax penalties, larger corporations face more pressing consequences. With the first default, no surcharge is made, but the second, third, fourth, fifth and six will incur financial penalties. You can read more on the tax arrears fines here.
There are many reasons you could face these penalties, including:
- Late registration or not even registering at all
- Filing late returns
- Paying the wrong rate of VAT on goods
- Late payment of the amount on the return.
If you do suffer the latter, you must contact HMRC immediately and negotiate a time to pay arrangement.
Have you registered?
As mentioned above, not registering for VAT is a reason your business may incur charges. Many smaller businesses do not register, simply as they believe their company will not perform well enough to qualify. However, this excuse is not valid with HMRC, and they will continue to calculate your bill and place it into arrears.
To avoid any surprises and potential/ increasing debt, you must get in touch with HMRC and discuss the following:
- Why you cannot pay your debt
- What you can do to begin making payments
- State if you can make an immediate payment
- Estimate the time frame for repayments
It’s important to note that sole traders must still submit quarterly VAT returns, and any debt will be considered personal. Therefore, the debt is subject to potential seizure and, in the very worst case, a winding up petition.
Tips for preparing VAT returns
Companies must file accurate VAT returns, and you can do so with the aid of your accountant or an in house bookkeeper. Most accounting software will prepopulate your VAT returns to make this task much simpler. However, if you still struggle, we highly recommend speaking to an accountant for those unable to file the returns, as the wrong information could also incur penalties or trigger a tax inspection. Those that are suffering from severe cash flow issues may do best to seek insolvency advice in an attempt to rescue the business.
There are tips, however, to staying ahead of the deadline for VAT returns:
Charge the correct amount of VAT
Ensuring that you charge the correct rate of VAT on goods and services is vital. The standard VAT rate for the UK is 20%, and will be charged on most goods. As mentioned earlier, there are exceptions to the rule, such as those goods outside of the scope of the UK and assets that qualify for lower VAT. However, this is a general rule of thumb, but you can find more information on VAT rates here.
Use the right VAT scheme
You can pay VAT liabilities via a number of methods, but you must choose the correct method to ensure you stay on top of the returns.
Standard VAT accounting method
Keep a record of all VAT paid and charged, and every three months this will be used to calculate your returns to HMRC.
Annual accounting VAT scheme
This scheme is available for businesses with a turnover of less than £1.35 million. Only one annual VAT return is submitted. From there, your company will then make quarterly interim payments on the estimates you owe.
Flat rate VAT scheme
The choice for most smaller companies with a turnover of less than £150,000. You pay a percentage of your turnover to cover any tax liabilities. VAT is still charged on invoices, but it is not required to keep records on all VAT transactions.
Cash accounting scheme
A cash accounting scheme involves paying VAT on sales when the customer pays, and reclaiming VAT on purchases when paying suppliers.
If you are unsure of which scheme to choose, seek advice for guidance on preparing the VAT returns. If you continue to miss payments, you will receive surcharges.
All businesses should keep accurate VAT records for at least six years, and you must ensure they are meticulous and readable. The best thing you can do to protect your company is to accurately record all sales and purposes. Should you ever require insolvency advice or face the prospect of liquidation, these records will help show you acted in the best interest of the company.
Pay by direct debit
If there’s one piece of debt management advice you must take away, it’s to pay your VAT returns through direct debit. HMRC will automatically take the correct amount from your bank within three working days of the deadline, ensuring your VAT bill is always paid. You will still need to submit your quarterly returns, however, and late filing will mean the payment is delayed.
You can also ask for reminders when logging into your online account to make sure you never miss a deadline. For those that are struggling to pay their bills and suffering from serious cash flow issues, we recommend seeking insolvency advice at the earliest possible moment. Our business rescue experts can work with you and your business for the best possible solution for survival.