HMRC cracks down on small business VAT payments

HMRC has raised an extra £3.5 billion over the past 12 months through enquiries into the under-payment of VAT by small businesses, according to new research.

The study, by tax investigation insurers PfP, was based on figures obtained by the company via a Freedom of Information request. It showed that HMRC’s local compliance teams, who are responsible for investigating small and medium enterprises, raised £7.7 billion last year through tax investigations.

Of this sum, almost half (45%) of the additional revenue brought in was from under-payment of VAT. PfP says this shows that VAT is now a key area of focus for HMRC as it looks to maximise its tax revenue. As HMRC has also announced the impending closure of 170 regional offices in favour of plans to employ specialist taskforces to complete tax-related investigations, the company also suggests that pressure on firms over VAT is only set to increase.

VAT can be seen as just an additional burden by some businesses but failing to properly report and pay VAT can lead to worse problems. Failing to file a VAT return and pay monies due could result in surcharges, which is a percentage of the VAT outstanding. For multiple defaults this could be as much as 15% and the original VAT owed would still need to be paid.

Interest can also be charged on underpaid VAT. This could be enough to tip a struggling business over the edge into corporate insolvency so it’s always advisable to make sure that accounts are accurate and up to date at all times.

EU VAT regulations which came into force at the start of last year have also been having an impact on some digital traders based in the UK. Under the rules, VAT is charged in the country where the products are bought, rather than the country where the seller is located for digital products such as e-books and apps.

With different rates of VAT being charged in different countries, this can make it difficult for sellers to display the correct price for a product before a purchase is made.

By Phil Smith

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