The New Year will see VAT increase from 17.5 per cent to 20 per cent and with the increase a new regime of fines for late or incorrect payment, warns Thames Valley accountants and business advisers James Cowper.

VAT registered businesses are advised to look at their work in hand and decide whether there is the possibility of invoicing before 4 January at the lower rate.

Ruth Corkin, VAT Manager at James Cower says: “If work is completed or goods delivered before 4 January the correct rate of VAT will be 17.5 per cent, but the invoice will need to be raised before 14 January. However, you can choose to invoice at the new 20 per cent rate if that makes accounting procedures easier.”

Any goods delivered or work commencing after 4 January will fall under the new rate, unless payment is received in advance.

Things become a little more complex with long term contracts that straddle the 4 January date, as Ruth explains: “Long-term contracts can often be a headache when the VAT rate changes. If the contract allows for periodic or regular payments or invoicing dates within the period of the contract the VAT rate to be used is the one in force at the date that the invoice is raised or a payment received.

“If the contract has no payment or invoicing schedule, then a tax point will only be created when an invoice is raised or a payment received. Therefore, businesses in this position should look at their work in progress and see how much could be invoiced prior to 3 January 2011 at the lower VAT rate.”

Penalties for errors
The spring will also bring new penalties for late returns and payments, replacing the current Default Surcharge system.

From 1 April 2011 the first late return will trigger an immediate penalty of £100 and a penalty period of 12 months. Subsequent late returns in that penalty period will increase by £100 per return (up to a maximum of £400) and each time the penalty period will be extended to 12 months from the latest period.

Ruth adds: “Further penalties are due if a return is outstanding for six and 12 months after the filing date and where HMRC suspect that the taxpayer is deliberately withholding information to prevent HMRC assessing the tax. The latter can be 100%of the tax underpaid.”

Failure to pay an amount of tax shown on a return will immediately trigger a 12 month penalty period. Penalties will be based on a percentage of up to four per cent of total tax due.

In the current economic climate, the VAT account will be seen as easy pickings for eager Inspectors. Whilst taxpayers are perfectly within their rights to adjust errors up to a maximum of £50,000 (depending on turnover) via the VAT returns, such adjustments are not immune from penalties.

“The penalties will not apply where there is a ‘time to pay’ agreement in place and there is the right of appeal if the taxpayer has a reasonable excuse for the lateness,” adds Ruth.

Finally, HMRC recognises that VAT is complex and has produced a ‘toolkit’ to help businesses record the correct amount of input tax.

Ruth concludes: “I would strongly recommend that businesses use this toolkit. Failure to do so could put businesses on the back foot in negotiations with HMRC if any errors are found in the future.”

The toolkit is available to download from the HMRC website: http://www.hmrc.gov.uk/agents/toolkits/vat-input-tax.pdf