Accountant Chat New VAT Penalty Scheme

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Apart from late filing penalties, a separate penalty will be charged if VAT owed to HMRC is paid late. The penalty amount depends on the duration of the delay. No penalty is charged if payment is made within 15 days of the due date, allowing some flexibility for businesses experiencing cash flow difficulties in a particular quarter.

If payment is made between 16 and 30 days after the due date, a penalty equal to 2% of the VAT owed at day 15 is charged. For payments that are 31 days or more overdue, the penalty increases to 2% of the VAT owed on day 15 plus 2% of the VAT owed on day 30, resulting in a total penalty of 4% on day 31.

From day 31 onwards, an additional penalty is charged either when the balance is cleared or when a time to pay arrangement is agreed upon (if not already in place by day 30). This penalty is calculated at a daily rate of 4% a year for the duration of the debt.

It’s worth noting that penalties can be avoided by reaching out to HMRC and arranging a time to pay agreement, preferably within 15 days of the payment due date. The HMRC Business Payment Support can provide assistance in this regard.

Late Payment Interest:

In addition to penalties, late paid VAT will also accrue interest from the due date until the full payment is made, even if a time to pay arrangement has been agreed upon. The interest rate charged is equal to the Bank of England bank base rate plus 2.5%.

Cash Accounting Scheme:

If your estimated turnover for the next 12 months is less than £1,350,000, you have the option to use the cash accounting scheme. This scheme aims to improve cash flow for small businesses by shifting the tax point from the invoice date to the payment date for both purchases and sales. It allows businesses to pay VAT to HMRC only after receiving payment from their customers, providing built-in bad debt relief.

It’s important to consider this scheme if your clients frequently make late payments or if you’re experiencing cash flow challenges. However, note that the same principle applies to purchase invoices—you cannot reclaim VAT on purchases that haven’t been paid for yet, so it may not be suitable if you have significant outstanding costs. Remember to exit the scheme if your annual taxable turnover exceeds £1,600,000.

VAT on Services Purchased from Suppliers Based Outside the UK:

When dealing with services purchased from suppliers outside the UK, such as e-books, website supplies, software, and advertising space, it’s crucial to understand the VAT implications. If you are registered for the Standard Rate VAT Scheme, you should only recover VAT when it has been charged by a UK supplier. Invoices from companies based outside the UK, like Microsoft, LinkedIn, Google AdWords, Adobe, and Zoom, should not include VAT charges if you’re VAT registered. By notifying the supplier of your UK business status and providing your VAT number, you can avoid these incorrect charges, reducing the cost to your business.

Once the supplier stops charging VAT, you need to account for the purchase under the reverse charge mechanism. Unfortunately, any VAT charged incorrectly in the past cannot be recovered. The reverse charge applies even if the supplier has a UK VAT registration number but is based outside the UK.

VAT on Services Provided to a Business Based Outside the UK:

If you provide services to a client based outside the UK and perform all the work for them (excluding instructions from a UK branch), the supply will generally be outside the scope of UK VAT. In such cases, you should not charge VAT on invoices to that client. However, you must obtain evidence that the client is a business and not a private individual, with their VAT registration number serving as one form of acceptable proof.

Conclusion:

Staying compliant with VAT regulations is vital for businesses, and understanding the new penalty rules for late VAT filing and payment is crucial to avoid unnecessary penalties and interest charges. By familiarizing yourself with these rules and exploring options like the cash accounting scheme, you can effectively manage your VAT responsibilities, improve cash flow, and maintain a healthy financial position for your business. Remember to consult with HMRC for specific guidance related to your circumstances.

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