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Debt Advice Handbook 14th edition

Value added tax

• The legal position
• Special features
• Checklist for action

Value added tax (VAT) is a tax charged by HMRC on most transactions of businesses with an annual taxable turnover of more than a certain limit, set annually. A business must be registered for VAT unless its turnover is below the limit.

The legal position

VAT is payable under the Finance Act 1972 and the Value Added Tax Act 1994, and subsequent regulations and amendments. Its scope and level are reviewed each year and changes are often made to the Act following the Budget.

Special features

VAT is a tax on the value added to goods and services as they pass through the registered business. So, although VAT is payable on purchases, this amount can be offset against the tax on the business’s own sales. For example, if the total purchases in a year were £100,000 and the total sales were identical, there would be no value added and no tax payable.

A debt adviser generally encounters VAT debts after a business has ceased trading and the partner or sole trader is left responsible for VAT (see Chapter 16). Some goods are exempt and the calculation of the amount of VAT is complicated. In most cases, seek help from an accountant specialising in VAT. If VAT is overdue, a surcharge, which is a percentage of the VAT owed, is added to the debt. This amount can be appealed.

Checklist for action

Advisers should take the following action.

•Consider whether emergency action is necessary (see Chapter 8).
•Consider whether the client should be referred to a specialist agency – eg, TaxAid.
•Otherwise, assist the client to choose a strategy from Chapter 8 as thisis usually treated as a priority debt if the business is continuing to trade. If the business is no longer trading, the arrears are a non-priority debt. Assist the client to choose a strategy from Chapter 9.