Generally, UK businesses registered for value added tax (VAT) must submit quarterly VAT returns. They can ask for their VAT quarters to coincide with their accounting periods. It is also possible to request “non-standard accounting periods” for VAT where the businesses works in twelve or thirteen week periods rather than calendar quarters. A business that regularly receives VAT repayments can request monthly VAT returns, so as to receive the repayments sooner and improve their cash flow position.
The VAT return must be sent to HM Revenue and Customs (HMRC) by the last day of the month following the period to which it relates. The payment of the VAT due should also be made within that time. The VAT “payments on account” scheme applies to businesses with a taxable turnover above £2 million. Businesses subject to the scheme must make two monthly payments on account during the VAT quarter. The final balancing payment is made when the quarterly VAT return is sent in.
The VAT return consists of a number of “boxes” to be completed with the relevant amounts. The total VAT output tax on supplies made in the return period is included in Box 1. In Box 2, the business must enter the VAT relating to “acquisitions” from suppliers in member states of the EU. In most cases the output tax declared in Box 2 can also be deducted in the same VAT return (if the trader can fully recover VAT). Box 3 of the VAT return contains the total of boxes 1 and 2.
In Box 4, the trader enters the VAT input tax on goods and services purchased, including VAT on capital expenditure. In Box 5, the trader deducts the total in Box 4 from the total in Box 3 and arrives at the amount of VAT payable. Where the total in Box 4 is greater than the amount in Box 3, a VAT repayment is due.
The total outputs (supplies) for the period are recorded in Box 6 of the VAT return. These are the total of standard rate, reduced rate, zero rate and exempt outputs in the period. Similarly, the total inputs (excluding VAT) for the period are entered in Box 7, including all the inputs of the business that are within the scope of VAT. The total sales of goods to EU countries, and purchases of goods from EU countries, are included in Boxes 8 and 9. These totals are required by the European Union for statistical reasons.
Submitting the VAT return
The person signing the VAT return declares that the information given in the return is true and complete. For this reason a person with an overview of the business such as the owner or a senior figure in management should sign the VAT return. Reasonableness checks should be done on the figures in the return to ensure against relatively simple mistakes such as entering figures in the incorrect boxes. Documentation and calculations should be retained as evidence to back up the figures in the VAT return and show how they were arrived at.
Where a VAT group has been formed, one of the companies in the group is appointed as the “representative member” of the group. This company completes the VAT return on behalf of the VAT group and makes the VAT payments.
Businesses with a turnover above £100,000 must submit VAT returns online. The position of businesses with a turnover below this limit will be reviewed by 2012.
Errors in the VAT return
Errors made in past VAT returns can be corrected on the current VAT return if the net value of the errors found during a particular VAT period is under £10,000; or less than 1% of the turnover declared on that return, up to a maximum of £50,000. Where errors are corrected in the current VAT return, no interest or penalties apply. Errors above those limits need to be separately disclosed. A voluntary disclosure can be made on Form 652. Interest will be payable on additional VAT payable, but no penalties are due. Errors discovered in VAT returns need to be carefully recorded and disclosed as quickly as possible.
There is a four year “cap” for both taxpayers and HMRC. This means that a business can only claim back overpaid VAT for the past four years. The cap also applies to HMRC who can only assess VAT return errors from the past four years.
Late VAT returns
A default surcharge system applies in the case of late VAT returns, or late payments of VAT. Where this occurs, a default surcharge notice is issued. Once this notice has been issued, the penalty for the next default within twelve months is 2% of unpaid VAT; for the following default within twelve months the penalty is 5% of unpaid VAT; and for subsequent defaults the surcharge rises by 5% each time to a maximum of 15% of unpaid VAT.
The business can have a defence against the imposition of penalties for a late VAT return if the return was dispatched in a way that would lead the business to reasonably expect HMRC to receive it on time. Another defence is that the business has a “reasonable excuse” for the late VAT return. A “reasonable excuse” could be a loss of key employees, a computer breakdown or a fire or burglary where VAT records are lost. For a small business, the illness of the person normally responsible for preparing the VAT return could be a reasonable excuse.
The late delivery of the VAT return by the tax agent or adviser of the business does not amount to a reasonable excuse. A business also cannot normally put forward as a defence that they lack the funds to pay the VAT. However in the Steptoe case the lack of funds was due to the late payment of bills to the business by a single customer for whom a large proportion of the business was performed, and the Court of Appeal accepted this as a reasonable excuse.
HM Revenue and Customs www.hmrc.gov.uk
“Value Added Tax” by Andrew Needham and Steve Allan, Bloomsbury Professional, 2009