VAT debts
VAT is a type of tax. Businesses with a turnover of an amount set each year by the government do not have to register for VAT, although they can choose to register voluntarily. All other businesses must register for VAT, unless HMRC grants an exemption from registering. VAT-registered businesses must file returns at a frequency agreed with HMRC to show the difference between the VAT they pay to other suppliers (input tax) and the VAT they charge their customers (output tax).
On 1 April 2019, most VAT-registered businesses needed to sign up to Making Tax Digital.
1 These businesses must keep digital records and use HMRC-compatible software to produce and submit their VAT returns. From 1 April 2022, all VAT-registered businesses must sign up for Making Tax Digital unless they have an exemption from doing so. Exemptions are based on:
•your age; or
•a disability; or
•you running your business from a remote geographical location; or
•you objecting to using computers on religious grounds; or
•any other reason why it is not reasonable or practical.
If a VAT return or payment is late, HMRC may be able to add a surcharge. This can increase the amount owed. Changes were made to these rules from January 2023. This is a complex area. If a client disputes any surcharges or penalties that HMRC has applied, signpost them to specialist advice. Also, if the VAT return is outstanding, HMRC can estimate the amount due and issue its own assessment. The amount estimated by HMRC is payable immediately.
Local HMRC officers who collect VAT vary greatly in their approach to struggling or failed businesses. In general, they consider themselves to be collectors of a tax that has already been paid by a third party to the client and of which the client is only a custodian. While this may bear little relation to the realities of running a small business, this attitude means officers can be more aggressive in the recovery of VAT.
Once payment is outstanding, the HMRC officer at a local office usually uses the threat of enforcement action to take control of goods to force payment. This may initially consist of a visit, phone call or letter to state that enforcement action will be used. An enforcement notice giving seven clear days before action will then warn that immediate payment is required and enforcement agents will be used in default. A warrant to take control of goods is then signed by an HMRC officer. A court order is not needed.
The warrant is usually used by a firm of private enforcement agents with an HMRC officer in attendance. HMRC can obtain a warrant to force initial entry, but this is rare. However, most business premises are accessible to the public (including enforcement agents), so negotiation is essential. A client who is still trading should always try to give the enforcement agents some money and treat this debt with utmost priority. Taking control of goods can provoke or escalate the collapse of a business, both by removing necessary stock or equipment and reducing confidence in the business.
If you have a client with unpaid VAT, you should:
•contact HMRC, explain the position and request a short time to organise the client’s affairs; and
•get an accountant to check the amount claimed, particularly if it is an assessed amount; and
•explain the seriousness to the client. Use a small business adviser if necessary to look at the viability of the business and its credit control procedures.
HMRC can use other methods to collect the debt, such as court action, including the summary warrant procedure, to recover arrears of VAT.
HMRC also uses bankruptcy as a means of collection. Any threat of bankruptcy must be taken seriously.
More information can be from a qualified accountant or the HMRC guidance manual.
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