1. Review VAT return processes to avoid late filing and payment surcharges

Companies regularly incur penalties for failing to pay their VAT. They typically say that there is no cash available, did not realise the importance of paying on time, or they simply forgot. HMRC is unlikely to accept any of these excuses, imposing a surcharge as a percentage of unpaid VAT as a result.

Dedicating any available cash to paying outstanding VAT on time and agreeing time-to-pay arrangements for the balance with HMRC before the due date can help to avoid late payment surcharges. If you make an error and receive a penalty, it is often worthwhile appealing.

As your business expands, your accounts staff will have to process higher transaction volumes and values. A simple review of VAT return processes and safeguards can highlight weaknesses before issues arise. Setting up reminders, documenting processes and having a plan for staff absences all help avoid problems.

2. Be aware of common errors when expanding into new markets

When expanding into new markets, it is easy to misunderstand the VAT rules. Charging VAT can be complex and subject to change when selling to customers in other EU countries or in the rest of the world. Some upfront research can help to identify the correct rates to use and how your VAT recovery can be affected.

Remember that EC Sales Lists are required when selling goods or services to EU customers and Intrastats may be required for high values of goods. Penalties can be imposed for failure to file these additional returns. Always check the validity of an overseas customers’ VAT number and keep a copy of the result. Holding shipping evidence is essential to support zero rating of goods sent overseas.

3. Manage your cash flow efficiently, don’t waste bad debt relief

As an expanding business, you have to closely manage your cash flow, and you may have customers in the same situation, stretching payment terms. You should have a system to automatically identify debts more than six months overdue in order to be able to claim back the VAT element of the unpaid amount and only pay HMRC when the debt is actually paid. Too often this is left as an annual exercise, wasting earlier relief.

If your turnover is below £1.35m, you can use cash accounting and get automatic bad debt relief without waiting six months.

4. Simplify reporting by forming VAT groups

Growing businesses often set up new activities in separate companies to ring fence risk that could lead to multiple VAT registrations. A holding company that has no taxable business activity of its own is not entitled to be registered or recover VAT on its compliance costs. By forming a VAT group, you can simplify VAT reporting and enable the parent company costs to be recovered, subject to recovery rules. 

5. Know when you reach the VAT threshold

High growth start-ups can reach the £81,000 VAT-registration threshold very quickly. Unfortunately, this is often missed as owners, busy managing a growing company, seldom think about it until their year-end. They can then be subject to late-registration penalties and undeclared VAT from the date they should have registered. Keeping a rolling monthly check on turnover will help avoid the cost and worry.

Sarah Barron is indirect tax manager at Menzies LLP.

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