UK Businesses Facing VAT Registration Delays

by Amanda Banks, Tax-News.com, London

16 October 2006

The UK's HMRC says that serious delays to the VAT registration process for new companies are due to the need to guard against 'carousel' fraud, and are unavoidable.

It is taking from 8 to 12 weeks for new companies to receive their VAT number, which can be very damaging. New companies are often net recipients of VAT from HMRC in the early stages of trading, when costs outweigh revenues, and having to wait for the money may harm their chances of success.

VAT partner at accounting firm UHY Hacker Young says: “Not having a VAT number can stop a business from trading - it’s as simple as that. Business partners often refuse to deal with unregistered businesses and many property deals in particular cannot be completed without a valid VAT number, as the legislation requires a VAT registration to be effective from certain deadlines, and buyers or sellers quite reasonably want confirmation before they proceed.”

“The delay in VAT registration and interminable checks on legitimate VAT repayments can cause serious cashflow problems, and some businesses have folded as a consequence.”

Legislation introduced in the 2006 Finance Act entitles HMRC to withhold VAT from innocent businesses in circumstances where it believes they ‘should have known’ customers or suppliers were engaged in fraud.

Simon Newark says: “Businesses are expected to devote time and resources to doing detective work on behalf of HMRC, but without clear guidance as to how much due diligence is expected, there is a tendency for businesses do far more than is strictly necessary just to cover their backs.”

HMRC says: '(We) are working to reduce the time taken to process VAT1’s, but in the current climate of criminal attacks on the VAT system, some extra checking is unavoidable. A new VAT 1 application form and guidance notes are due to be launched towards the end of November 2006. With an improved layout and clearer questions it is hoped that this will help applicants to complete the form correctly and reduce general processing times.'

The agency is also continuing to plan towards the introduction of a 'reverse-charge' VAT regime for firms trading in a wide range of electronic goods and mobile phones, in response to continuing 'missing trader' carousel fraud.

Goods covered by the reverse charge regime will include mobile telephones, computer chips/microprocessors/central processing units, electronic storage media, handheld devices for recording or playing of sound and or images, handheld computers, handheld communication devices other than mobile telephones, positional determination devices for GPS system, games consoles with screen, or of a kind used with a television or computer.

The UK has requested a derogation from the 6th EU VAT Directive to allow for the introduction of reverse charge accounting in respect of transactions of these goods. Under reverse charge accounting, it is the responsibility of the purchaser, rather than the seller, to account for VAT on the transaction. Implementation in the UK is dependent upon the EU derogation, the timetable for which is not fixed. Based on current progress, HMRC expects to implement the reverse charge on 1 December 2006.

Implementation of the reverse charge requires fundamental changes to the accounting systems of businesses trading in the relevant goods. Those accounting system changes are in turn dependent upon changes to the software that supports the accounting systems. For some (often larger) businesses with their own bespoke accounting systems, it is a question of making the necessary changes to those systems. For other businesses, it is a matter of amending a standard software accounting package via an update provided by the software supplier.

HMRC says it recognises the central importance of actively facilitating the development and delivery of software systems enhancements. To this end, the agency is now working intensively with software developers to provide them with details of the accounting requirements to operate the reverse charge in practice, and the specification for the associated creation and submission to HMRC of reverse charge sales lists. The goal was to release a first version of the 'specification' by the end of September.

Some businesses, says HMRC, will have to adopt some interim arrangements (by way, in effect, of a manual workaround). HMRC intends to work further with businesses (and their advisers) 'to help them to identify pragmatic
administrative solutions that can be adopted, which, while serving to corroborate that reverse charge accounting and reporting is being operated appropriately, at the same time minimise, as far as possible, the administration burden that such arrangements place on the businesses concerned.'

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