PrintSpeak survival guide: VAT management

nil recessus carborundorum

success story...

VAT management

This week’s success story concerns a printer unprepared for a VAT inspection. After being hit with an assessment for £30,000 of underpaid VAT, the managing director began to manage VAT properly, contributing positively to cashflow.

The printer specialised in direct mail, and employed 35 staff with an annual turnover approaching £6m. VAT had never been a straightforward proposition,

partly because the VAT liability on print is complex to begin with, and partly because a proportion of this printer’s work was for charities (which are VAT-exempt). However, the company’s book-keeper completed VAT returns in good faith, and the company saw no reason to worry when it was contacted by HM Revenue & Customs to arrange a VAT inspection for a fortnight hence.

Accounting discrepancy

Upon inspection, it emerged that there was a discrepancy in the accounting process over part of the printer’s premises that was being sub-let to another business; the rent being paid by the tenant had not had VAT added to it, because rent is normally exempt. However, this meant that not all VAT on costs should have been reclaimed, and no adjustment had been made for this.

We had a bad experience, but I also realised that aside from that, we could manage our VAT a whole lot better to positively contribute to our cashflow

The managing director was given the chance to explain the mistake, but there was no good explanation other than carelessness on the part of the book-keeper.

When the inspector’s assessment arrived, the managing director found to his horror that the liability amounted to just under £20,000 over the course of the previous three years, plus interest and a further penalty charge of 30% of that liability, amounting to almost £30,000 in total.

De-minimis limits

As this was a mistake rather than an error, the MD saw no point in lodging an appeal, and was given 30 days to pay. Fortunately he met a VAT consultant who agreed to look at the assessment. The consultant discovered that the VAT was within ‘de-minimis’ limits and negotiated with HMRC to withdraw the assessment.

Nevertheless, the experience shocked the MD into action. “We had a bad experience, but I realised that aside from that, we could manage our VAT a whole lot better to positively contribute to our cashflow,” he said. He called in the specialist VAT consultant who carried out a thorough overhaul of the company’s VAT practices.

VAT management measures

Over the course of a year, the consultant helped the printer put in place a number of VAT management measures, including a fast-track process for entering purchase invoices as quickly as possible to reclaim input VAT in the minimum time; and a practice of occasional delay in issuing sales invoices to coincide favourably with VAT quarters, allowing the printer to hang onto his 15% in the bank for as long as possible within the quarter.

The consultant also negotiated additional VAT recovery for the printer on an ‘accruals’ basis, which gathered the printer around £22,000 in recovered VAT. And the printer was also made aware of the bad debt VAT relief initiative, whereby VAT already paid on a bad debt can be recovered if the debt is over six months old.

Positive benefit

The MD was delighted by the package of measures, which he said had “given us some positive benefit in terms of cashflow and much cannier practices – VAT has ceased to be a big stick for us, and now we get it to work for us.”

what is...

VAT management?

VAT is a complex issue and many companies don’t understand how to work it to their best advantage, says Barry Stocks, head of VAT services at BTG Tax

VAT is an indirect tax levied on supplies, rather than on profits. Many goods supplied by printers are complicated in terms of their liability, but the general rule is that everything is standard-rated unless there exists a specified ‘relief’ for it

Certain rules governing VAT changed on 1 April 2009, and many businesses remain unaware of the extent of the changes. You can find out more online at www.hmrc.gov.uk/vat/index.htm

If you are aware of any VAT discrepancy, it is best to disclose it to HMRC voluntarily, before you are contacted for an inspection; this will mitigate any potential penalties

If you are targeted for a VAT inspection, call in a specialist who will do a ‘dry run’ with you before the inspectors turn up, to discover any potential issues in advance

If discrepancies are discovered, HMRC inspectors usually give time for an explanation. After the explanation is given, the inspector will produce an assessment of the VAT liability, together with any interest and penalty applicable. Penalties range from 30% of the liability for careless mistakes, up to 100% for deliberate fraud

Don’t just accept an assessment; have it looked over by a specialist who understands VAT, as there may be reasons for reducing the assessment or even having it withdrawn entirely

Look at positive measures for managing your VAT. If your turnover is below £1.6m, consider switching to the cash accounting scheme, whereby VAT is only paid out when your invoices are paid to you

Smaller businesses (with a turnover under £150,000) should consider the flat rate scheme

Make sure you claim all the VAT you’re due, including VAT on expenses and subsistence allowances. A good VAT consultant can assess all the potential avenues for claiming

who can benefit from...

VAT management?

HMRC is set to get tougher on VAT following the changes in legislation effective from April this year

VAT inspections are not set at random: instead, HM Revenue & Customs weighs up a number of factors, including the size of the business, the complexity of its industry (and print is a complex business, as there are many rules governing VAT liability on printed products) and the company’s previous VAT record – late payments, previous underpayments, etc. If you’re a large print outfit with a poor record, you’re a potential target for a VAT inspection. However, printers of all sizes and payment records can benefit from good VAT management practices

The penalty changes in VAT that took effect on 1 April 2009 have as their common objective the HMRC goal of encouraging greater compliance. Cynics say that the government must recover more revenue in unpaid liabilities and penalties to help boost economic recovery, but whatever the reason, it is certain that the net of VAT inspection will be spread wider than previously

Welcome to the PrintSpeak Printers' Survival Guide - helping you to ride out the recession

The pages of the printing trade press have recently read like a Domesday roll-call of print's great and formerly glorious. Who could have predicted the failure of Borcombe SP, Kelvin Print Group, Quebecor, Capital, Printhaus, Butler and Tanner, Celloglas and more? With margins on print lower than they've ever been, the current global economic crisis is magnifying the cracks in every print business model.

But for every bad news story, there are plenty of success stories. Here at PrintSpeak, we decided to pull together a weekly newsletter looking at printers who recently hit a sticky patch - and what pulled them through. We hope it will provide our readers with food for thought. A struggling business is not necessarily a failing one - and knowing who to call is half the battle. In the coming weeks we'll be looking at subjects including factoring, debt collection, credit management, VIAMBOs, cost rate reviewing, credit insurance, financial restructuring and more - building a library of business know-how and giving you the contacts and knowledge to ride out the recession.

Karen Charlesworth
Publisher, PrintSpeak
karen@printspeak.co.uk