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Aug

Not VAT registered? ..... Mind the chasm! PUBLISHED IN VAT

It is not unusual to find that clients who have no (apparent) obligation to register for VAT also have a marked fear or detestation of ever having to register. It is as if they think that coming into the VAT tent puts them inside the jaws of the inspectors and leaves them with worrying and arduous tasks which are prone to error and liable to give grief. And so they are and might, but that is only one side of it, and in fact it is actually much safer to be in the tent than outside it.

 

First, some basics about VAT registration. You cannot register for VAT unless you make at least some taxable supplies as a business venture. But you do not have to register compulsorily unless you exceed the mandatory threshold. You can volunteer to register if you make taxable supplies below the threshold. Most businesses will only voluntarily register if it pays them to, such as where the VAT they charge can be claimed by their customers or where the VAT to claim is greater than the VAT to pay (exporting businesses being an example). But there is a much overlooked reason for registering besides that, and it is this other reason I intend to promote to you.
 
Basically, it is this: if you are registered for VAT and you get something innocently wrong, then the most HMRC can do is assess for arrears of four years (which used a short while ago to be only three years). But what if it proves that you were unregistered but you ought to have been? The retrospection period is not four years as one might have imagined, but twenty.
 
It doesn't take a moment to realise that the retrospection period for the unregistered is five times that for the registered. But more importantly it is obviously a vast period which will almost certainly generate a ruinous liability. Indeed, the same would probably be true of a ten year liability. Considering that many small businesses that may have mistaken their position (often through plain lack of awareness) are sole proprietorships or partnerships (often comprising one household) the consequences are dire because of unlimited liability (another good reason to use a limited company).
 
HMRC's recent initiative to encourage people to make a clean breast of their possible failure to have registered brings this issue into sharp relief. They are offering reduced penalties but cannot offer remission from any of the tax (though they do offer time to pay it). The fact that they now use personal or company tax returns to detect VAT registration oversights makes them far more efficient than they were before they used that technique. 
 
This issue was brought into sharp focus for me when I read the upsetting tax tribunal case concerning Mrs Evans. She ran a retail business as a sole proprietor between 1997 and 2008, making a meagre living, and not being VAT registered. She appears to have believed that rendering her tax return was enough to indicate any liability there might have been to register for VAT (if she ever thought of VAT at all). This is because she thought that "the authorities" knew about her financial affairs. That, unfortunately, proved naive.
 
Having retired in 2008 on a small pension, and with no other financial resources, she duly destroyed her business records and settled down to a frugal old age. Then a letter arrived suggesting that her tax returns indicated an overlooked liability to register also for VAT. After some correspondence HMRC determined that she should be registered effective from January 2002, which means that her VAT liability stretched for over six years. Imagine what the consequence would have been had it gone all the way back to 1997. But it was bad enough because, having taken zero rated sales into account, she still owed £10,000. The tribunal to which she appealed waived the added penalty but could do nothing about the tax. How HMRC will collect that huge sum from an old lady who has no financial resources is anyone's guess, but whatever is arranged, it seems likely that her old age has been blighted and more or less ruined.
 
And what if she had registered as soon as she was able? She might well have decided quickly that she would not make a decent profit and did not have a viable business, since she could then have seen the impact of VAT on her profits. She might have closed it. So she may well have ended up paying very little VAT. And she may then have chosen to obtain paid employment serving in someone else's shop, which would have ended unremarkably and with a peaceful if not lucrative old age. And had she made an error in her VAT accounting through most of that time then the time limit would have been limited to three years retrospection (though now that period is four years). 
 
But all of that is irrelevant hypothesis. We cannot argue that she does not owe VAT on the basis of such counterfactual possibilities. She owes VAT on the business she actually carried out, however false was the premise as to its viability. This illustrates the importance of not missing the appropriate opportunity to register for VAT.
 
And this is not an isolated example. The case of Reza Rastegar makes the same point in relation to another business which was on the margins of viability, and here, the figures were larger.
 
Life inside the VAT tent has its stresses and strains but the risks of being on the outside seem to be out of proportion to being inside. 
 
 
 
 
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