TIPS & ADVICE VAT
Your monthly guide through the minefield of VAT rules, regulations and procedures
PENALTIES
Increase to penalty interest rates
The penalties and interest rates charged by HMRC on late-paid VAT changed on 6 April 2025. How should your business act to avoid incurring the new charges?
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Increase. The rate of interest charged on late return payments has been 2.5% above the Bank of England base rate in recent years. However, this increased to 4% above this rate from 6 April 2025; with a base rate of 4.5%, that will be annual interest of 8.5%.
Trap. Interest will be charged even if you are one day late with your payment.
Penalties. From 6 April 2025, late payment penalties also increased:
• VAT owed at the end of day 15 after the due date increased from 2% to 3%
• VAT still owed at the end of day 30 after the due date increased from 2% to 3%; and
In this issue...
• VAT overdue by 31 days or more increased from 4% to 10%
Example. If your business should have paid £10,000 on its February return by 7 April 2025, but it’s paid on 7 June 2025, you will be charged a £300 penalty on 22 April; a further penalty of £300 on 6 May; from 7 May to 7 June it will be £10,000 x 10% x 31/365 days = £84.93. Total penalty = £684.93.
Time-to-pay arrangement. If you cannot pay on time and agree a time-to-pay arrangement with HMRC before the due payment date, you will not be charged penalties for the late payments. However, you must comply with the payment arrangement otherwise penalties will be applied. The number to call to discuss this is 0300 200 3831, and the line is open Monday to Friday 8am to 6pm.
Tip. There is an incentive for you to make regular part payments because this will reduce interest charges and penalties. They are both charged according to the amount of tax owed on a particular date.
› The increased rates mean it is even more important to make prompt payments. You can avoid penalties by setting up a time-to-pay arrangement with HMRC but interest will still be charged. If you do agree a plan, try to make additional payments to minimise the interest cost.
Should you agree to your customer’s self-billing request?
A customer wants to adopt a self-billing system, meaning they will issue invoices on your behalf and charge VAT or otherwise. Can you refuse their request and what are the risks of accepting?
What is self-billing?
A self-billing system means that your customer will issue sales invoices on your behalf, and you must not invoice them. The customer will know if you are VAT registered and will therefore add 20% VAT to the self-billed invoices if the work carried out is standard-rated. You will account for VAT on your return that includes the “tax point” shown on the document, unless you use the cash accounting scheme (CAS) when the payment date is relevant. A valid self-billing arrangement must meet the following conditions:
• the supplier and customer must both agree to adopt it, either signing an agreement on paper on in electronic form
• the customer must prepare the agreement with a specified start and finish date. HMRC has provided an example in its public notice which can be used or adapted (see The next step)
• the self-billed document issued by a customer is the only acceptable document for VAT purposes. It must always show the “tax point” date, i.e. the date when the supplier must declare output tax to HMRC on their return.
Tip. Your customer does not need HMRC’s approval to adopt self-billing so don’t ask them for any confirmation letter etc.
Trap. HMRC could ask to see the self-billing agreement if it carries out a compliance visit, so you should retain it as an important part of your records.
Why agree to self-billing?
Your customers might be better placed to know the fees you should charge at the end of, say, a month or quarter. For example, many contracts in the construction industry make regular monthly
payments based on measured work; the customer’s surveyor often calculates the amount that is owed. A self-billing system speeds up the process because you don’t need to contact them to ask how much to invoice for.
Example. John is an author and is paid 15p per word plus VAT for articles he writes for a publisher. It is likely that only the publisher will know the exact word count, e.g. are words used in headlines or bylines included in the payment? A self-billed arrangement might be more efficient and save time.
Trap. If you don’t use the CAS, you will account for VAT on the return that includes the “tax point” date shown on the self-billed document. This date could be several days or weeks before the customer pays, leaving your business with a temporary cash-flow challenge.
What are the risks and can you refuse?
It is your responsibility to charge the correct rate of VAT to your customers on your supplies of goods and services, even though they will issue the selfbilled invoices. The risks are therefore lower if your sales are all subject to 20% VAT. Many customers are not clear about when zero or 5% VAT is charged in some cases!
HMRC will not insist that you agree to self-billing with your customers, it is your decision. However, your customers might insist on using self-billing as a condition of doing business with them, in which case you could lose money by refusing their request.
Trap. If you agree to self-billing, it will apply to all of your sales with that customer; you cannot pick and choose.
› You can refuse the request but you might lose your customer’s business. Review the selfbilling agreement before you sign to ensure you are satisfied with the terms. You must not issue tax invoices if self-billing is agreed.
Selling goods to the EU and Northern Ireland
You plan to start selling goods to EU and Northern Ireland customers for the first time, to both businesses and private individuals. What VAT issues must you consider before you begin to trade?
Goods arriving
When your goods arrive in the customer’s EU country, the customs procedures that apply there will need to be completed and import VAT must be paid. Your first challenge is to decide who will act as the declared importer when the goods arrive, your business or your customer.
Before the UK’s departure from the EU, customs documentation was not required because of the free movement of goods. This meant that many EU customers, both businesses and private individuals, were used to placing a single order and payment with a UK supplier, and waiting for the goods to arrive at their premises or house. It is no longer that simple.
Tip. It will usually be easier if your customer will act as the importer, especially for business-to-business sales.
Trap. Northern Ireland (NI) is still part of the EU’s single market for goods but not services and has special rules, see below.
Extra paperwork
Your customers will not usually pay extra VAT postBrexit, and EU business customers who import your goods will be able to claim input tax in most cases, but there are increased admin costs, and you will need to take account of this in your pricing models. These measures will help:
Import One Stop Shop (IOSS). This scheme will help if the shipment value of your goods into the EU is €150 or less. You will charge your customers VAT at the point of sale based on the rate that applies in their country and account for tax collected on all EU sales on a single return that is submitted each
month to your chosen tax authority.
Registering for VAT. Your business will be the importer of record when the goods arrive and you will claim input tax on the VAT charged at import and other local expenses. You will charge output tax when you sell on the goods in that country and complete monthly or quarterly returns.
Tip. You can register for the IOSS with the tax authority in any member state but it makes sense to choose one where English is widely spoken, e.g. Ireland or the Netherlands.
Trap. Registering for VAT in an EU country can be expensive and time consuming. You might need to appoint a local VAT representative who will be jointly and severally liable for any unpaid VAT, so their fees are costly.
What about Northern Ireland?
Your business will normally treat a GB to NI sale as a domestic UK supply, i.e. charging the rate of VAT that applies in accordance with UK law. However, NI is also considered to be part of the EU customs union to avoid a hard border between NI and Ireland, which is an EU member state.
NI’s special status means there is an extra risk of goods being moved between mainland GB and the EU and bypassing customs procedures. Special rules therefore apply if your goods shipped to NI are “at risk” of being moved into the EU. It is for the importer to assess this risk and pay any duty, tariffs etc.
Tip. The rules for trading in goods with NI are complex and you should sign up for HMRC’s Trader Support Service for assistance (see The next step).
› You must decide if you or your customer will act as importer when the goods arrive in the EU. You should consider registering for the Import One Stop Shop or overseas VAT if you are the importer but there are extra time and administration costs with both options.
SUBLETTING
Do we charge VAT when we rent out a desk?
Q. Our business allows one of our subcontractors to use a chair and desk at our office, he also uses our communal kitchen facilities and toilets. He pays us a fixed amount each week, irrespective of how much time he spends there. Should we charge him VAT on the fee?
A. The starting point is that most supplies of land (including rent) are exempt from VAT. However, to qualify as a land supply, there are four things that must be met in each case: the supply must be for a specified piece of land; for a specified time period; the tenant/user must be able to use the land to the exclusion of all other parties; there must be consideration paid by the tenant/user.
In your situation, the subcontractor does not have a specific area that you allow him to use, so the arrangement falls short of a rental agreement. You must therefore charge him VAT. Perhaps you could give him his own locked room at your premises, which he can control by having his own key, and no other person can use the room. That would enable a rental agreement to be secured, which would not be subject to VAT. However, it would still be wise to formalise the terms with an agreement signed by both parties.
BUSINESS SPLITTING
Can
we create a separate business for new activity?
Q. My husband and I are VAT registered as a partnership and trade as a DIY store in a small town. We plan to expand our activities by selling Christmas trees but will only have sales in November and December and our total annual turnover will be less than the compulsory registration threshold. Should we form a separate business to avert a VAT liability on these sales?
A. Your question does not mention if you will sell business to business (B2B) or business to consumer (B2C) with your new activity, i.e. to VAT registered customers or otherwise. If you are only doing B2B, your customers will claim input tax in most cases, so charging VAT is not a problem. However, your sales are probably B2C, hence your query.
As your DIY trading and Christmas tree sales are very different activities, there should be no problem in forming a separate legal entity, as long as you keep separate accounting records, bank accounts, invoices etc. Perhaps you or your husband could be a sole trader for this activity, i.e. a different legal entity to the partnership?
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Editor:
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Philip McNeill MA (Cantab) - FCA CTA PGCE
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