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Sadly Steve Allen died in July 2011. His wife Leah would like to thank all those who know Steve and helped contribute to his success. She has recommends Steve's clients and anyone who is interested in this article topic to contact Rob McCann from “The Vat people” on (tel) 0161 477 6600 . Please make reference to Steve Allen.

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HM Revenue & Customs on-line services and future changes to payments and penalties

With the coming together of the Inland Revenue and HM Customs & Excise to form HM Revenue & Customs (‘HMRC’) it quickly became evident that two departments on-line services needed to be reviewed and brought together under common systems.

It is targeted for the new systems to come on-line in 2010, although based on passed experience it seems unlikely that it will come in on time and in budget.

One of the most far reaching changes will be as a result of Lord Carter’s review of the Governments online services. He has recommended that all filling should be done online, including VAT returns. The mandatory filing and paying of VAT returns will be phased in from 2008. 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 (Default Surcharge) if its software breaks down and a business cannot submit its return on time. However, if a business has a problem with its software or its service provider breaks down it could still be liable to a penalty for late submission of its return. HMRC have been asked if businesses could submit a paper return if the computer systems have broken down to ensure that the returns arrive on time and, therefore, avoiding a penalty for late returns. Helpfully, they have responded that electronic filing will be mandatory, so they propose that any paper returns that are submitted will generate a penalty under a new regime for failure to submit returns electronically.

In the event of a default surcharge arising, a business has the right to have it removed if he can show that he has a ‘reasonable excuse’. It seems likely that there will be a lot of reasonable excuse cases before the VAT Tribunals following these changes as businesses try and show that late returns were caused as a result of unforeseen computer breakdowns and outside their control. We would expect the Tribunals to take a reasonable view in these cases, particularly if a business can show that it has taken all reasonable steps to submit on-line within the prescribed time limits.

HMRC is also undertaking a consultation to standardise penalties across the Department. The consultation document confirms a proposal for a unified penalty regime across all the taxes administered by HMRC, and a new approach with the level of penalty reflecting the range of behaviours.

The new penalty regime will cover incorrect returns for income tax, corporation tax, PAYE, NIC and VAT will take effect in 2009. The new rules will be based on both the amount of tax understated and the behaviour that gives rise to the understatement. There is also a new concept of suspended penalties.

The legislation is included in the Finance Bill 2007 and will provide for a single new penalty regime for incorrect returns. The penalty is based on the amount of tax understated or that would have been lost, the nature and behaviour giving rise to the understatement and the extent of disclosure by the taxpayer.

It is expected that the penalties will effect returns for periods commencing after 31 March 2008 where the return is filed after 31 March 2009.

The new regime will replace current rules and there will be:

• No penalty where the taxpayer makes a mistake;

• Moderate penalties for failures to take reasonable care;

• Higher penalties for deliberate action; and

• Still higher penalties for deliberate action with concealment .

Each penalty can be substantially reduced where the taxpayer makes a disclosure, more so where this is unprompted, and there will be the right of appeal against penalty decisions. A new concept of suspended penalties will also be introduced. HMRC will be able to impose a penalty, but not enforce it for a period of time, and if the taxpayer makes no further errors the penalty will lapse. This will, no doubt, encourage business to be compliant.

Taxpayers may find it easier to understand a single penalty regime applicable across the different taxes

One of their latest proposals is for a new range of penalties for those who fail to render their returns on-line. They would cover NI, Corporation Tax, and VAT returns. During the transition to mandatory on-line filing HMRC say they will put in place a program to help businesses adjust to the new system, particularly, they say, those who do not have access to a computer, but presumably they do not intend to give them free computers. HMRC say that the new penalty regime is to send a signal to businesses that the Government is serious about expecting businesses to move to online filing and that, ultimately, businesses that don’t comply without good reason will be penalised.

HMRC are considering a transitional period following the introduction of Lord Carter’s recommendations, possibly six months, during which no penalties will be imposed. During this period HMRC will issue warning letters to those that file paper returns. HMRC will also allow a defense of reasonable excuse for failure to file on-line.

It is proposed that the level of the penalties will vary between £100 and £300 and will be based on the size of the business measured by turnover. To reflect business size the proposed model therefore suggests a different flat rate penalty for large, medium and small businesses. The definition will be based on turnover for the previous year. The definition for new traders will be based on the estimated turnover shown on their registration form. The turnover bands will be based on Companies Act criteria for defining business size. HMRC also intends to discourage payment by cheque, although they do not intend to introduce a penalty regime for those that do continue to use cheque payments. These proposals are subject to a short and very limited consultation process.

The proposal is that the payments received by cheque will only be effective from the date the funds are cleared into HMRC’s account. This will give a cashflow disadvantage to businesses paying by cheque as they will have to send their returns in earlier and make sure that the cheque has cleared by the end of the month not just that the return has to be there by the end of the month. Businesses that are adversely affected should contribute to the consultation.

Other areas of HMRC’s on-line VAT services are also coming under scrutiny following the introduction of the new VAT 1 registration form.

The good news on the registration front is that HMRC has changed its policy on the registering of intending traders and started to review and improve the systems for processing the VAT registration forms. The new VAT 1 has reduced the amount of information that is required and is easier to complete so reducing the number of queries raised. As a result of this the processing of VAT 1 registration forms has speeded up considerably.

Following a short period where processing times started to fall the registration units were reorganised and staff numbers reduced, not surprisingly processing times have risen again.

However, all is not well with the on-line VAT registration system. Having introduced the new paper form HMRC then tried to transfer it to the on-line service and found that the software could not be changed to accept the new registration form. Because of the overhaul of the whole system it cannot be amended to accept the new form until at least 2010. HMRC is now seriously considering withdrawing the on-line registration service or having the new VAT 1 on-line in some form, probably Adobe, which can then be e-mailed to HMRC and processed manually. This completely removes the advantages of on-line completion, automatic processing and verification of large sections of the form.

About the Author

Steve Allen is the Director of VAT Solutions (UK) Ltd, an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. Both not only are respected tax advisers, but have worked for both Customs & Excise and one of the top four accountancy firms for many years. This mean that their team know both sides of the equation and are truly experts in this field.

The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from their website

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Article Published/Sorted/Amended on Scopulus 2007-06-22 21:23:53 in Tax Articles

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