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HMRC internal manual

Debt Management and Banking Manual

Debt and return pursuit: VAT: understanding the customer: interventions to encourage compliance

There are a range of interventions that can be explored as a means to obtaining payment and influencing future compliance that fall outside the normal recovery route. The individual circumstances of the taxpayer and the nature of their non-compliance are factors in determining the best course of action.

The primary objectives are to obtain payment of the outstanding debt and to encourage future compliance. These objectives can be achieved by the appropriate use of ‘supportive’ or ‘coercive’ measures, dependant upon the reason for non-compliance.

Supportive measures

These are designed to educate and assist the taxpayer to achieve voluntary compliance, generally making it easier for them to render the return and pay next time.

You should consider whether any of the supportive measures below would help the taxpayer achieve future compliance. You may want to use the phone call as an opportunity to explain any schemes that may help in the future.

The taxpayer should also be directed to VAT accounting schemes: the basics (HMRC website).

Flat rate scheme

The flat rate scheme is designed to help small businesses by letting the customer calculate their VAT payment as a flat rate percentage of their turnover. The percentages are decided according to the trade sector the business is in. Public Notice 733 - Flat rate scheme for small businesses is available to download.

Annual accounting

This allows the customer to submit one VAT return each year and pay interim instalments based on an estimated liability for the year. Customers then complete a VAT Return two months after the year-end with the balancing payment. Public Notice 732 - Annual Accounting is available to download.

Cash accounting

The cash accounting scheme allows customers to account for VAT (output tax) on sales on the basis of payments received, rather than on tax invoices issued. However, users of the scheme can only reclaim the VAT incurred on their purchases (input tax) once they pay their supplier. This scheme helps customers with cash flow difficulties and is especially helpful if they give their customers extended credit or suffer a lot of bad debts. Public Notice 731 - Cash Accounting is available to download.

Outstanding returns

Where additional debts are advised and examination of VISION has shown that a customer has outstanding periods, the taxpayer should be advised to file them online. The oldest period outstanding will be shown when they go online to file.

They should be advised that any returns subsequently filed may be subject to the four year capping rules if payment has already been made against the assessments, and submission of the return creates an overpayment.

Further details on this can be found in VR7510 - Four year cap - other provisions: Capping of late returns: General.

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Coercive interventions

Coercive interventions are designed to enforce compliance or aid in removing the taxpayer from the system. Most of these measures will be unsuitable for use with first time defaulters but there will be instances where, however, coercive interventions are appropriate, where for example a new business has a substantial debt and there are links to previously failed businesses.

Monthly returns

Regulation 25 of VAT Regulations 1995 allows us to determine the prescribed accounting period for a VAT return. For persistently non-compliant customers, HMRC would direct them to submit monthly periods. Forcing taxpayers onto monthly returns could force them into compliance as it makes them address VAT payment on a more regular basis and has the benefit of reducing the risk in cases of incipient insolvency.

County court proceedings (CCP)

CCP is used on occasions where distress is inappropriate or has been unsuccessful. It is a useful alternative to EIS, particularly for deregistered customers and those with a good name to protect.

You can take CCP against deregistered customers.

See DMBM605450 on Pre-enforcement: preparing a case for enforcement: Enforcement and Insolvency criteria: CCP criteria.

Fast track to Enforcement and Insolvency Service (EIS)

This is used in rare occasions where the overall debt is increasing despite intervention. This course of action will stop a debt increasing and will remove a clearly insolvent customer from the system.

Security referral

Traditionally a tool for ‘Phoenix’ customers, security action can be considered for persistently non-compliant customers where there is a risk to future revenue.

The customer must deposit an amount equal to six months VAT liability (four months if the business renders monthly returns). If paid, this amount (the ‘security’) is held for at least 12 months during which the customer must make and pay their returns as normal.

If a return is either not filed or goes unpaid then security equal to the debt can be offset against it. You should refer appropriate cases to your Insolvency &Securities contacts in the Securities team (Special Civil Investigations) who will give advice on the parameters for referral.