Now that the January 31^st online self-assessment filing date has passed, accountants for contractors can turn their minds to online VAT filing.

HMRC recently reminded businesses that are registered for VAT that paper returns are about to become a thing of the past. As from this spring, all VAT returns have to be submitted online.

At the moment only newly registered firms and businesses with a turnover in excess of £100,000 have had to submit their VAT return online and pay electronically. All other VAT registered companies have been allowed to submit a paper return.

However, online filing will be essential for accounting periods that start on or after the first of April this year. This means that the 1.9 million UK businesses that are registered for VAT will have to enrol on HMRC’s website to use the VAT Online Service.

The Revenue will be sending letters to all traders this month advising them of what action they need to take.

There are various benefits to be gained from online filing. You will get an automatic acknowledgement as soon as your return has been received. The system includes a sum checker and probably most importantly, an email will be sent to alert you of when your next VAT return is due to be filed.

There is various information available on HMRC’s website to help businesses move from paper to online filing. The Revenue also has a VAT Online Services Helpdesk that can be contacted Monday to Friday, between the hours of 8am and 6pm, on 0845 010 8500.

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Limited company contractors who have overpaid VAT are unlikely to be allowed to claim compound interest from HMRC.

The European Court of Justice’s advocate general has decided that despite HMRC’s breach of European law, the VAT that was overpaid by UK taxpayers would only have simple interest applied.

Some of the overpayments date back to 1973 and taxpayers have been arguing that the overpaid amounts should attract compound interest. However, Trstenjak, the advocate general, said it was unlikely that taxpayers would be allowed to claim compound interest and his opinion is general followed by European court judges.

Stuart Walsh, a tax partner at McGrigors, said this was a significant blow to the many UK businesses that are currently contesting VAT claims. There is a vast amount of money at stake and given the uncertain state of the public purse, this new guidance could provide a significant boost to the Treasury.

By allowing the Revenue to only pay simple interest it gives it the incentive to keep hold of taxpayers’ money in order to boost its own cashflow position. That perverse incentive would have been removed if HMRC had to pay compound interest on overpaid VAT.

HMRC has also recently been accused of deliberately withholding notices informing small businesses that their income tax returns were late. The tax tribunal said the Revenue was using small businesses as cash generators by not alerting them straight away when tax returns were late. HMRC disagreed with the ruling and said it would not refund money to those who had been hit by steep penalties.

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Contractor accountants may be interested to learn that research from PwC suggests that last year’s VAT increase caused overall prices to increase by about 1%.

Consumers who were already struggling with rising food and energy prices saw a VAT rise from 17.5% to 20% at the beginning of 2011.

However, the chief economist at PwC, John Hawksworth, said the increase had a temporary effect and should not have an adverse impact on inflation or growth this year, providing there is no further increase in the rate of VAT.

He went on to point out that the VAT increase did have been some positive effects; at least as far as the UK economy goes. We now a smaller budget deficit and a lower long term interest rate.

Stephen Coleclough, a partner at PwC, explained that other countries in the European Union are following the UK’s lead and raising their VAT rates. France and Italy have both increased VAT, whilst the rate in Hungary has risen to 27%.

VAT increases are inflationary and intended to raise revenues. They also need to be set to meet the growth needs of individual nations, he added.

People in Ireland saw their VAT rate increase from 21% to 23% on the first of January this year. Originally the increase was to be implemented in two stages but it was decided to bring the rise forward to limit damage from the Euro crisis.

The Italian government raised VAT by 1% to 21% last September. A further 2% increase is expected in September this year, followed by a possible 0.5% rise at the start of 2014.

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Two Welsh sisters were recently jailed for three and a half years after attempting to defraud HMRC out of £161 million.

The Colwyn Bay women funded lavish lifestyles by making false claims to the Revenue, including a VAT repayment scam.

The women were arrested in January 2009 after HMRC launched an investigation into the recruitment business the sisters claimed to run. In fact, they had set up fictional limited companies, which they then registered for VAT purposes, simply as a means of reclaiming VAT.

In addition to the fraudulent VAT claims, the sisters received tax credits worth £120,000 over a period of 5 years. However, Revenue investigators discovered that although Roberta Vaughan Owen claimed to be self-employed, she had also been receiving incapacity benefit since 2002.

The other sister, Andrea, attempted to get bridging loans worth £751,000 by claiming she earned between £18,000 and £22,000 a month and both of the women attempted to defraud insurance companies. Their final fraudulent act came in December 2008 when they attempted to reclaim the £161 million in VAT from HMRC.

The assistant director of HMRC, Simon De Kayne, said the sisters funded their lifestyle by spinning a complex web of deceit and fraud. They carried out a variety of criminal acts culminating in the £161 million VAT scam. However, the Revenue intends to show them that crime does not pay and will take steps to relieve them of their ill-gotten gains.

He went on to explain that HMRC scrutinises claims very thoroughly and since the department implemented a new error and fraud strategy, it has stopped tax credit payments worth more than £1 billion.

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HMRC has alerted all companies and contractor accountants that are registered for VAT that important changes to the filing process will come into effect in spring 2012.

As from April first next year, all VAT returns have to be filed online and all remittances must be made electronically. Under the present regime, only companies with a turnover of more than £100,000, and those that are newly registered have to use HMRC’s online VAT filing system.

The new regime will affect all returns for VAT periods starting on the 1^st April 2012 and beyond.

The Revenue says it makes sense to switch to the online filing system now rather than get caught up in the last-minute rush. However, before any business can take advantage of the benefits of online VAT filing, they will first need to register with HMRC’s VAT Online Service.

Whilst businesses are thinking about filing their VAT returns online, contractor accountants should be concentrating on ensuring their online Self Assessment tax return is filed before the end of next month.

Taxpayers who have previously completed a paper Self Assessment return should register for online filing as soon as possible. The registration process is simple but HMRC warns that it can take up to 10 days for the Activation Code to reach taxpayers as it is sent out by post.

People who have previously used the online filing system should make sure they have not lost their login details, as they also will have to wait up to 10 days for a replacement.

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HMRC is rubbing its hands together in glee after increasing the amount it collects from its compliance work.

In the last 12 months, HMRC’s income from investigations into tax avoidance and tax evasion rose to £16.5 billion. That’s a 37% increase on the last financial year.

Accountancy firm UHY Hacker Young said the increase was a result of the taxman adopting a more aggressive approach. Enquiries into corporation tax provided the Revenue with £4.6 billion, whilst VAT inspectors brought in £6.2 billion – up 92% on the previous year.

According to UHY Hacker Young, the government believes that if it keeps on investing in tax inspectors, the extra money will continue to flood in. In reality, a lot of businesses settle up because they feel intimidated by HMRC.

Roy Maugham said the Revenue’s aggressive stance is going some way towards helping reduce the budget deficit. However, the downside of this is that the Exchequer will find it harder to work out the total cost of compliance and the UK will become a less attractive place to do business.

A lot of UK companies have already moved their headquarters overseas to countries like Ireland, Malta and Switzerland, he continued. They have done this to escape the high business taxes in the UK and HMRC’s aggressive attitude to tax collection.

The Treasury could lose out in the long run as the lost revenues from companies relocating overseas outweigh the revenue brought in from increased compliance activity, Maugham concluded.

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HMRC has reminded contractor accountants that companies have until the end of this year to register for VAT under the Revenue’s recent initiative.

The Revenue launched the VAT initiative in July. The initiative was aimed at companies that should have registered for VAT but hadn’t and it provided them with the opportunity to put their tax affairs in order. Rule breakers were given until the end of September to confirm that they would be participating in the scheme.

Since that date, the Revenue has identified some of the people who did not come forward and they could now face significantly higher penalties, and in some cases, criminal prosecution.

The VAT campaign targets companies that have an annual turnover in excess of £73,000 and have not registered with HMRC for VAT. The sectors affected include agriculture, business services, construction, horticulture, hospitality, property and retail distribution.

Firms that did register their intention to participate in the VAT initiative must complete the registration process no later than December 31^st. Once registration is complete, they will be issued with a VAT registration number and directions on completing their first VAT return. The majority of companies will face a 10% penalty charge on their underpaid VAT.

Marian Wilson, the head of campaigns at HMRC, explained that everyone needs to pay their fair share of VAT and the Revenue will be targeting those who it believes should have come forward early next year.

She went on to urge anybody who has unpaid VAT liabilities to come forward now. The penalty imposed for owning up now will still be less than if the Revenue is forced to conduct a lengthy investigation into their affairs, she added.

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The National Audit Office has praised HMRC for persuading people to file their tax returns online, but says it is not clear whether the system provides value for money.

The NAO says that more than 11.5 million people a year now use online filing. However, some users have complained about access to HMRC’s website at busy times and the Low Incomes Tax Reform Group is calling on the Revenue to offer other alternatives to people who do not have Internet access.

Online filing has reduced processing costs, as well as postal, stationery and storage costs. Cumulative savings by the end of this financial year are expected to be £220 million and the drive to persuade people to file online is on time and within budget.

However, the NAO says HMRC is not able to draw a comparison between the costs of paper and online filing. It is therefore impossible to conclude that the benefits of online filing are being maximised and the system has been successful in delivering value for money.

Robin Williamson from the LITRG said that it should not be made mandatory to use the Internet to conduct dealings with HMRC and robust, well-advertised options must be made available to people who cannot transact online.

It’s both reasonable and sensible to encourage businesses to use digital channels to communicate with the Revenue but the government department should not forget that some individuals do not have access to the Internet or the capability to cope with online filing, he added.

Some professional organisations have also questioned whether it is cost effective to file corporation tax and VAT returns online.

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HMRC has warned online accountants not to get hit by unexpected charges if they’re doing their Christmas shopping abroad.

Angela Shephard, the head of customs policy at the Revenue, explained that a lot of people go abroad to buy Christmas presents, or shop online from countries outwith the European Union, believing that the goods are cheaper. However, the price you see may not be the final price you pay.  There is a limit to the amount you can purchase abroad before becoming liable for import duty or VAT.

People arriving in the UK by commercial air or sea transport, from a country that is not part of the EU, are allowed to bring in goods to the value of £390 duty and VAT free. Alcohol, tobacco and fuel are subject to separate allowances. Individuals arriving by other means are only allowed goods valued at up to £270.

If you purchase Christmas gifts over the Internet from a non-EU country, you will be liable for VAT if the package is valued at more than £15. Customs duty may also have to be paid if the goods are valued at more than £135.

If you receive a present from a non-EU country, you will be liable for import VAT if the value of the gift exceeds £40.

Individuals can bring back as many duty and tax paid goods as they like from another EU country providing they are for their own use. However, customs officials are within their rights to ask questions if you return from France with your vehicle weighed down with beer, cigarettes, wine and spirits.

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Accountants may be interested to read the latest Office of National Statistics research concerning UK householders VAT expenditure.

The data shows that the UK’s poorest households now pay more VAT in proportion to their total income than they did twenty-five years ago, whilst in the richest households, the proportion remains the same.

In 1986, VATable items accounted for 45% of the poorest 20% of households’ weekly expenditure. By 2001/02 they were spending 58% on items that attracted VAT. That percentage has dropped slightly, but in 2009/10 they were still spending 55% of VATable items.

Over the same period, the percentage of income the richest 20% of households spent on VATable items remained virtually unchanged. The ONS research does not take into consideration the period since the VAT rate increased to 20%.

Still on the subject of VAT, employers need to be aware that changes to the VAT regulations concerning salary sacrifice come into force from the 1^st of January next year.

In the past, salary sacrifice schemes have proved popular in part because they brought with them tax advantages, such as reduced PAYE and NIC liabilities and a VAT advantage.

However, as from the start of 2012, employers who recover VAT on benefits and then pass them on to employees under a salary sacrifice arrangement will have to pay VAT on the amount sacrificed.

HMRC says that schemes such as the Cycle to Work scheme will fall under this new arrangement, as will food and catering provided by an employer. Childcare, pensions and private health insurance salary sacrifices will remain unaffected by the new regime.

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Last week protesters, including several IT contractors, gathered outside the London headquarters of HMRC to demand that Dave Hartnett, the permanent secretary for tax, resign.

A message on the UK Uncut website said the action was taken because of public outrage at the role Hartnett played in letting mega-rich corporations off paying billions they owed in tax. Examples of these let-offs include the settlements agreed with Goldman Sachs and Vodafone, both of which were multi-billion pound disputes.

Police met protesters at the main entrance to HMRC’s HQ and minor scuffles ensued. Protesters demanding the sacking of Hartnett followed Vince Cable, the business secretary, as he walked past the building.

UK Uncut says that Hartnett is a dishonest representative of a crooked system that allows the richest 1% to routinely avoid paying their fair share of taxes.

Hartnett has built up a high profile in the last few years and his reputation as the Whitehall civil servant who is most wined and dined has been linked to secret deals that let wealthy organisations off paying billions in tax.

UK Uncut estimates that £25 billion in Treasury money has been lost to tax evasion and had this money been collected, there would have been no need for the current government austerity measures.

Meanwhile, new research claims that plans to charge banks VAT would not lead to a significant increase in revenue for the government.

The study was conducted by Ben Lockwood, a professor at the University of Warwick, in conjunction with PwC. It found that the only potential increase in revenue would come from charging VAT on consumers because both EU banks and their business customers would be able to reclaim any VAT that was levied on them.

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Contractor accountants and freelancers may have been among the 1.5 million taxpayers who received penalties for late filing and payment of self-assessment tax returns after this January’s deadline.

McGrigors obtained figures under a freedom of information request that showed 10 million self-assessment returns were issued and 15% of taxpayers were hit with penalties. That represents an increase of 8% on the previous year.

Jason Collins, a tax partner at McGrigors, said that percentage is far too high. HMRC is issuing fines at a worrying rate and now they have won the right to dramatically increase the fines they impose.

The penalty for late filing is £100, so the 1.5 million fines levied after January’s deadline represent a minimum £150 million for the Treasury. However, there have also been changes to the penalty regime that mean fines could be as high as £1,500 plus 100% of the tax due.

Rebecca Benneyworth from Tolleys explained that the government is trying to make the system of penalties consistent across all the UK’s tax regimes and we are now seeing new measures put in place on the first day of April and October each year.

As well as a change in the penalty structure for self-assessment, business owners should be aware that HMRC is planning to adopt a similar approach to the late filing of VAT returns. Late filing will attract an automatic £100 fine and penalties will increase as filing and payment becomes more overdue. It has not yet been decided when to implement this regime for VAT. The earliest possible implementation date is April next year.

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