VAT

VAT flat rate scheme

An optional flat rate scheme was introduced on 25 April this year for businesses with a tax exclusive annual turnover of up to £100,000. Traders who join the scheme avoid having to account for VAT on all the individual goods they buy and sell. Instead they calculate their net VAT liability as a percentage of their total turnover (including their exempt income). The flat rate percentage applied depends on the trade sector into which a business falls for the purposes of the scheme and is between 5% and 14.5%.

The government is planning to extend the scheme from April 2003 to businesses with an annual turnover of up to £150,000. This will mean that over 650,000 businesses will be eligible for the scheme. In addition there will be a campaign to raise awareness of the scheme. Finally, the government will seek views on whether the scheme could be further extended and improved.

VAT penalty regime

The VAT default surcharge is designed to encourage businesses to submit their VAT returns and tax payments on time. When a business is late in paying its VAT for the first time a penalty is not applied, but it is notified that if it is late again it will be liable to a surcharge. The penalty rate increases from 2% of the tax paid late up to a maximum of 15%.

The rules were reformed last year so that businesses with a turnover up to £100,000 are offered advice and support and the opportunity to sort out any difficulties before they incur penalties. As announced in the April 2002 Budget the qualifying turnover will be increased to £150,000.

Tackling VAT losses

The Chancellor announced the first ever concerted strategy to tackle VAT revenue losses which have a wide variety of causes from deliberate fraud and avoidance to simple error. The strategy will be supported by the deployment of 1,000 staff to key problem areas. Customs intend to increase the support given to help businesses meet their VAT liabilities while at the same time cracking down hard on those who choose not to comply, who enter into tax avoidance schemes, or who engage in fraud.

VAT and freehold buildings

The sale of the freehold of a newly constructed building is liable for VAT during the first three years of the building’s life. However companies have been exploiting a loophole which allows them to pay VAT at the point of payment rather than at the point of sale. These companies then arrange freehold sales with an associated company which delays the bulk of the payment until after the three year period, and effectively purchase the property VAT-free. New legislation will be introduced to block this loophole.