HMRC Powers To Request Security For VAT

HMRC now have the power to request that a VAT registered business provide security for the payment of VAT liabilities. This allows them to request an amount of money where they consider there is a risk that VAT will not be paid by the business. The following may give HMRC reason to use these powers: -

• A non-compliant business where there is a history of late returns and/or payments. 
• A business run by disqualified directors or by undischarged bankrupts. 
• A business run by a person who has previously been prosecuted for a VAT offence. 
• A newly registered business connected with persons with past failures to pay VAT due. 

HMRC may request security without warning and it is a criminal offence to continue to trade without providing the security payment. A penalty of up to £5,000 per taxable supply (invoice) may be charged if trading continues without payment.

How is the security amount calculated?

The following factors are taken into consideration when calculating the security amount: -

• VAT declared on previous returns of the current or any previous business. 
• VAT declared on VAT returns from businesses of a similar size, with similar customers from the same trade class. 
• Taxable turnover. 

It is therefore important that you ask HMRC how they have calculated the security as you may be able to give justified reasons as to why the amount should be reduced.

Where quarterly returns are submitted HMRC will require an amount of security based on the VAT they estimate will be payable over six months or if monthly returns submitted over four months. It is therefore worthwhile requesting to go on monthly returns.

How long is security held for?

HMRC will regularly review the requirement for security and will return it when they consider there is no longer a risk to the collection of VAT. At the very least they will review the requirement after twelve months of it being provided in the case of monthly returns and two years in the case of quarterly returns. This is another reason to request to go on monthly returns if you are faced with a security demand.

What factors should be looked for to see if a demand for security can be resisted?

• Where a director has been involved in a business that has gone into liquidation with outstanding VAT and that director was not directly responsible for the financial mismanagement of the company, it may be unreasonable of HMRC to request security from any new company that they become involved with. 
• Tribunals have also ruled that where the liquidation of a company has occurred for reasons outside the control of those running the business it is unreasonable for HMRC to request security. Such reasons may include where the company’s main customer went into liquidation. 
• Tribunals have also ruled that where a new company can prove itself to be financially sound, has submitted all VAT returns on time and paid all liabilities in full it is unreasonable for HMRC to request security from that new company. HMRC should make these checks before they issue any demands and where they have not, the demand may be challenged. 
• HMRC are also required to make detailed enquiries into the financial position of new companies. Failure to do so means that HMRC have failed to assess the risk to the revenue posed by the new company and so the demand for security would be unreasonable. 

What should you do if you receive a notice to request security?

• Do not ignore the notice. It will not go away and as explained above could lead to criminal prosecution and severe penalties. 
• Maintain regular communication with the Officers concerned or seek professional advisors to communicate with HMRC on your behalf. 
• Provide HMRC with a thorough history and reasons which have perhaps led to the inability to file returns or pay the liabilities. 
• Request to go on monthly returns as this may help to reduce the security amount and shorten the time that the security is held for. 
• Establish how the security amount has been calculated to determine if it is flawed. 
• Negotiate the security amount. 
• Consider appealing to Tribunal.

Overriding Consideration

HMRC are clearly waging war against those who habitually fail to submit VAT returns or do not pay what is outstanding. Such traders are in for a tough time and, if they are to avoid such measures, they really have to get their VAT affairs in order very quickly.

If you have an issue with the above, or for more information on any of our points, please contact the either Rachael or Anthony via any of our social media or by calling the office on 01234 301000.