The Value Added Tax (VAT) landscape is ever-evolving. We explore some top-of-mind themes - dealing with errors, VAT penalties and the complexity of import VAT calculation for e-commerce.
The new UK late VAT penalty system
For late VAT payments and late VAT return submissions, the UK has a new penalty system. Since January 2023 a point system determines the way penalties are charged the first returns affected were due on the 7th of March. The new system aims to make penalties fairer and more proportionate. It replaces the default surcharge for late VAT return submission, late VAT payment, late nil return submission, and repayment returns. Paul Riley, Director of Tax Administration, HMRC, said: “Our aim is to help customers get things right before monetary penalties are applied; a points-based system for late VAT returns will not punish the occasional error.”
Dealing with calculation errors
Discovering and rectifying errors on VAT returns can be time-consuming and costly. A penalty will be assessed by HMRC if the error is:
- because 'reasonable care' was not taken
- 'deliberate', such as purposefully sending incorrect information
- ‘deliberate and concealed’ — for instance, sending incorrect information on purpose while taking measures to conceal the error
The severity of the penalty is based on the cause of the error. The maximum penalty may be higher the more serious the cause. If you assist HMRC in making things right, they may be able to reduce the penalties.
There are specific processes to be followed and time limits to adhere to minimise penalties for inaccurate VAT return calculation. Some lower value errors can be adjusted on your next UK VAT return, where net value of VAT correction does not exceed £10,000. For any other greater value error or reasons such as deliberate errors, you must review HMRC’s guidance and seek professional advice. Automating your VAT calculation and compliance processes reduces human error and demonstrates ‘reasonable care’ in your processes. It also means you can integrate with your accounting systems, validate inputs such as VAT registration numbers and generate a robust audit trail that tracks any changes made. You benefit from your implemented technology staying abreast with all the real-time updates to rates and regulations so you’re always using the correct treatment for your VAT. This all helps to make it far easier to spot both one off errors and trends, and to calculate VAT quickly and accurately.
EU Import VAT calculation - marketplaces and e-commerce
Back in 2021 legislation introduced substantial VAT liabilities and compliance requirements for online merchants and marketplaces/multi-seller platforms facilitating sales to EU private consumers. It ended an era where governments missed out on indirect tax revenue from distant sellers and created a VAT level playing field for business. Changes to EU VAT rules for e-commerce have also attempted to make things simpler for buyers and avoid surprise VAT charges.
But for the seller - whether via a marketplace, electronic interface or direct - VAT became more complex with a series of new compliance measures. Facilitating the correct collection, declaration, payment and reporting of VAT is hard. Different scenarios involving the specific concepts of ‘consignment’ and ‘intrinsic value’ mean changing definitions of buyer and seller. Plus the location of your customer and the value of the goods are also key signposts for different treatments for VAT.
An attempt to simplify
The EU One Stop Shop (OSS) system introduced a mechanism to simplify VAT compliance for distance sales. OSS enables your business to declare and pay VAT in one country, rather than having to register for VAT in each EU member state. The Import One Stop Shop (IOSS) is a similar scheme that applies to businesses from outside the EU, selling goods to the value of EURO150, to customers in the EU. This scheme allows you to register for VAT in one EU member state and use that registration to declare and pay VAT on low-value goods imported into the EU.
The good news is that Vertex VAT Compliance supports all EU e-commerce regulations, including OSS and IOSS with integrated currency conversion and e-file generation/transmission. The cloud-based application supports VAT across multiple countries with anytime-anywhere access without increasing IT infrastructure or maintenance needs.
You can find out more about how to efficiently manage your end-to-end VAT process, from VAT calculation and determination to reporting and compliance.
Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.