The schedule for introduction will be:
Businesses with a turnover greater than £5.6 million and newly registered businesses will have to file electronically for VAT periods starting after 31 March 2008.
Businesses with a turnover greater that £100,000 with VAT periods starting after 31 March 2010.
The Government will review the position of businesses with a turnover less than £100,000 in the run up to 2012.
This will obviously impact small businesses that do not use computers or individuals that are not happy using new technology.
More interesting is the fact that HMRC will allow late returns without imposing a penalty (i.e. Default Surcharge) if their software breaks down, and you cannot submit your return on time. However, if you have a problem with your software, or your service provider breaks down, you could still be liable to a surcharge for late submission of your return. We have asked HMRC if a business could submit a paper return when its computer systems break down, to ensure the return arrives on time and thereby avoid a surcharge. Helpfully, we have been told that electronic filing will be mandatory, so they will not accept paper or faxed returns, and any that are submitted that way will be ignored and a default surcharge levied - nice!
The Default Surcharge regime works like this; a first late return and you get a warning letter, another late return within 12 months, and a penalty of 2% of the tax due is imposed. This grows with each subsequent fault within a 12 month period to 5%, 10%, and finally 15%. Only when you submit 12 months’ of returns on time (and with full payment if due), can you get back to zero.
In the event of a default surcharge arising, a business has the right to have it removed if it can show that it has a ‘reasonable excuse’. It seems likely there will be a lot of reasonable excuse cases before the VAT Tribunals following these changes, as businesses inevitably try to show that the late returns were as a result of unforeseen computer breakdowns, and so outside their control. We would expect the Tribunals to take a reasonable view in these cases, particularly if a business has tried to submit a paper return and HMRC have refused it!
Improve VAT recovery!
There have been rumours that there has been a recent change that has made it more difficult to recover VAT. This seems to be based on changes in the Budget to the authorisation process for partial exemption special methods.
So what exactly is partial exemption, and what is a special method? Input VAT cannot normally be recovered on the costs associated with making an exempt supply. If you make a mixture of exempt supplies and taxable supplies, you are partially exempt.
The first stage in the process of recovering input VAT is to directly attribute the costs associated with making taxable and exempt supplies. Any purchases directly attributed to making taxable supplies can be recovered in full. The balance of the input VAT (light, heat and other general overheads) cannot normally be directly attributed, and so will be the subject of the partial exemption calculation.
Most businesses use what is known as the partial exemption ‘standard method’, which is laid down in the law (Regulation 101, SI 1995/2518).
The calculation is based on the formula:
Total taxable supplies x 100 = %
Total taxable and exempt supplies
This gives the percentage of non-attributable input VAT that can be recovered. The figure calculated is always rounded up to the nearest whole percentage, so, for example, 49.1% becomes 50%. This percentage is then applied to the non-attributable input VAT to give the actual amount that can be recovered.
The standard method does not always give a fair and reasonable result, so when that is the case, a business is allowed to negotiate a ‘special method’ with HMRC. In theory, you can have any special method you like providing it gives a fair and reasonable result. Before you use a special method, you have to have it agreed with HMRC first.
Common special methods use staff numbers, floor area, transaction counts, or purchases, but others can be used if appropriate to your business.
In the Budget, the Government proposed a change to the method of authorising special methods, and put it out to a consultation which has now been completed. The proposed change was to introduce a requirement for a business to declare that 'to the best of its knowledge and belief', its proposed partial exemption 'special method' is fair and reasonable before HMRC gives approval for its use. According to HMRC, the change means that they would no longer approve a special method without such a declaration from the business, and that, if subsequently, in their view, the business 'should have known' the method was not fair and reasonable, they would be entitled to set it aside and require the business to recalculate past returns using the standard method.