By Diana Flier, senior compliance analyst, Intuit UK

Small businesses across the UK are being targeted by HM Revenue & Customs (HMRC) in a clamp-down on VAT avoidance.

HMRC’s VAT Initiative applies to all businesses which have a turnover of £73,000 or above, and who have not yet registered for VAT. More than 40,000 small businesses have been identified as possibly operating over this threshold. Sole traders in particular are being investigated for eligibility — either knowingly or unknowingly. The notification deadline is 30th September 2011 — that’s only 1 days away now!

Over the summer period, HMRC has been sending information, warnings and notifications to small businesses across the country alerting them to the details of the VAT initiative. Eligibility criteria, deadlines and the penalties of not taking action have been publicised so there’s really no excuse for missing the deadline.

In principle, VAT eligibility should be fairly straightforward — businesses operating with revenues of over £73,000, incorporating all business ventures, need to be registered and paying VAT. However, for small businesses who manage their own finances, they often don’t have the time or inclination to keep up-to-date with the latest taxation rules and sometimes run into problems. Small businesses that use manual methods for bookkeeping, such as spreadsheets, are at a disadvantage to those using accounting software, as spreadsheets are not easy to use for forecasting and analysis. According to a recent Intuit survey of more than 500 small businesses, 31 per cent of those polled said that they have made a mistake in their dealings with HMRC.

The penalties are harsh

If the 30th September deadline is missed, HMRC will impose penalties, further investigation and possibly criminal charges. If businesses choose to make a full disclosure now, in advance of the deadline, they will receive a relatively low penalty rate of 10% of net tax due and in some cases there will be no penalty. However, if VAT avoidance has been carried out knowingly, guilty parties will face much stiffer penalties — in some cases, up to 100% of net tax due.

What are the benefits of VAT registration?

There are a few rogue traders out there giving small businesses and certain industries a bad reputation. Being VAT-registered is an extra ‘tick in the box’ for small businesses and provides an element of assurance and trust to customers. It can also raise the status and credibility of a small business with potential customers.

It obviously gets the taxman off your back too

Poor record keeping is one of the top five reasons why businesses in the UK fail, so it is in small businesses’ interests to get their books into shape, regardless of the VAT Initiative. Having a clear view of finances and cash flow forecasts will help businesses run more successfully. Simple accounting software enables small businesses to take advantage of cash forecasting benefits, such as invoice discounting and whittling out their ‘bad’ customers.

With a series of targeted campaigns aimed at small businesses, HMRC will not accept the excuse of, “I didn’t realise I was eligible to pay VAT”. Following the initial VAT registration notification deadline of 30th September, 31st December will be the final deadline to send in the VAT application form with full accounting figures. So, small businesses must get their books in order, fast.

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