The Government is cracking down on those avoiding tax this week.
Tax is never a happy topic, and the prospect of a prowling tax man out for your money can be daunting. Whether you are a small business owner, a self-employed individual or a large trader, you have to take responsibility for your own taxes, and VAT is no exception.
VAT is the tax paid by consumers who buy goods and services from VAT-registered companies both in the UK and throughout the EU. Most goods and services are payable at the standard rate, which currently stands at 20% (raised in January 2011 from 17.5%). Some things, like children’s car seats or domestic gas and electricity, are payable at a reduced rate of 5% and some goods considered to be ‘essential items’, such as food, books, children’s clothes and equipment for disabled people don’t attract VAT at all.
Should your business be VAT registered?
The rules around VAT registration are very simple: any business with an annual turnover of more than £73,000 should be registered for VAT. HM Revenue & Customs (HMRC) is aware that there are a large number of companies who have not joined the scheme. Some businesses are reluctant to register for VAT as this means they will have to pass the cost onto their customers, thereby raising their prices and becoming less attractive in a competitive market place.
But HMRC is aware of this practice and has launched a campaign to tackle this exact problem in an effort to redress the ‘tax gap’.
What is the ‘tax gap’?
Put simply, the tax gap is the difference between the tax that should be collected, and the tax that actually is collected in the UK.
Tax evasion is a form of fraud and is illegal (as opposed to tax avoidance, whereby cunning but legal methods of reducing tax liabilities are employed) and it is estimated to cost the Government billions in revenue each year.
[SPOTLIGHT]In 2010 HMRC released a report, ‘Measuring tax gaps’, which puts the figure at £40bn, but some think the real loss to the UK economy is much higher as many ‘cash in hand’ transactions slip under the radar.
The VAT crack down
Whatever the true figure, there is no doubt that vast sums are lost through tax evasion each year, and HMRC has devised various strategies for recouping some of these huge losses. As part of its ongoing campaign to reduce the deficit, HMRC is targeting companies and businesses who ought to be registered for VAT.
It is currently operating an amnesty whereby if these companies come forward voluntarily before the 30th September – this Friday! – they will avoid the severest penalties that this kind of tax evasion can attract.
Who is likely to be targeted?
HMRC has identified various professions that it feels contribute most enthusiastically to the ‘tax gap’ and will be specifically targeting them during this campaign. So, if you work in an area such as hair and beauty services, construction, motor vehicle repair or recreational services then it could be the time to get your business affairs in order! Once the amnesty is finished, businesses that remain unregistered could be subjected to a detailed investigation into their tax affairs, and punitive measures if they are found to be out of line.
This is the third time the Government has launched such a campaign and in the past they have proved to be fairly successful. According to the HMRC Director of Risk and Intelligence, Mike Wells, the previous campaign raised over £500m through voluntary disclosure of liabilities alone, with a further £100m being collected through follow-up investigations.
What can you do?
If you should be registered for VAT but for whatever reason you have omitted to sign up, all is not lost.
Normally, if you do not register for VAT with HMRC at the right time you have to pay all the VAT due from the time you should have registered, which could result in a hefty bill!
However, under the amnesty if you come forward voluntarily now and make a full disclosure, you are likely to only face a 10% penalty rate on VAT paid late. There is even speculation that you might escape being penalized at all. If you do not come forward and are discovered by HMRC, you will be hit with a bill for 100% of the VAT owed.
It’s also worth bearing in mind that serious and intentional evasion of VAT is an offence under section 72(1) of the Value Added Tax Act and carries a sentence of anything between five months and a whopping seven years, in addition to an unlimited fine.
If you suspect VAT fraud
Although nobody is over the moon about paying taxes, we are all aware that they are crucial to the smooth running of the country. In this era of austerity cuts, enforcing the collection of legitimate tax receipts is all the more important in order to fund our hospitals, schools, police etc. People who cheat on their taxes are cheating us all!
If you suspect that a firm is avoiding paying VAT, or charging VAT when they aren't VAT registered, you can report them anonymously to HMRC by calling the free Customs Hotline.