Self-employed warned of heftier VAT penalties

HM Revenue & Customs’ amnesty for VAT dodgers is more likely to confuse business owners and the self-employed than collect significant amounts of tax, a chartered advisor says.

Despite the initiative offering lower penalty charges, accountants at PKF warn the taxman will charge more if the business “knew” its turnover was over the VAT threshold but did not register for the tax.

Unhelpfully, HMRC will not say how it will decide whether a taxpayer ‘knew’ of their VAT obligations, nor has it specified the penalties it will charge on other tax arrears that individuals have to disclose to use the amnesty.

The advisor spoke of HMRC taking an “extreme view,” in terms of whether the business was aware of its VAT liability, with internet access potentially deemed as proof enough that the business knew of its obligations.

The mere completion of a tax return could also evidence the business knowingly dodged VAT, “because HMRC could argue that if you knew enough to register for income tax you would have known you also needed to register for VAT.”

Lisa Topliss, VAT partner at PKF, added: “HMRC’s guidance notes say people who use this initiative will ‘know how you will be treated’ but at the moment that is just not true.

“This campaign may be intended to bring hidden businesses in the unofficial economy into the tax net but it is unlikely to succeed unless HMRC make it very clear how much coming clean is going to cost.”

Under the amnesty, penalties will be waivered on the VAT payable for business owners who should have registered for VAT from July 5^th 2011, and will be levied at 10% for others.

“Anyone who owes VAT or other taxes on undeclared business income should own up now before HMRC catches up with them,” PKF advised the 40,000 firms targeted in the amnesty. “But if you do need to put things right, you will certainly need to take advice from an expert on how much it is going to cost you.”