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Why small businesses must get their books in order, and fast.

By Diane Flyer, Intuit

UK small businesses have until 30th September 2011 to notify HM Revenue & Customs (HMRC) that they should be registered for VAT. The VAT Initiative applies to all businesses which have a turnover of £73,000 or above. More than 40,000 small businesses are being targeted by HMRC, which it believes generate enough sales to push them over the threshold, into the VAT paying bracket. There is a particular focus on sole traders, which may be eligible – knowingly or unknowingly.

This summer, small businesses across the country have been receiving information and warnings from HMRC on who is eligible to pay VAT, what the deadlines are, and the penalties of not taking action within the deadlines.

According to HMRC, missing the 30th September deadline will result in penalties, further investigation and possibly criminal charges. If businesses make a full disclosure now, most will face a low penalty rate of 10 per cent of net tax due, in some cases there will actually be no penalty incurred. However if VAT avoidance has been carried out knowingly, the penalty will be much stiffer – in some cases up to 100 per cent of net tax due.

What needs to be done now?

Small businesses must review their books to establish annual total revenues, and whether they have exceeded (or are likely to exceed) £73,000 this year. The figure must take into account goods received both from the UK and other EU countries. Separating business activities to avoid paying VAT won’t work and HMRC is aware of this VAT avoidance tactic – the sales from all businesses must be added together, and the sum cannot exceed £73,000.

So the penalties are harsh, but is there a carrot to this stick?

A few rogue traders are giving small businesses and certain industries a bad reputation. However, being VAT-registered may raise the status and credibility of a small business with potential customers – it’s an extra ‘tick in the box’ and provides an element of assurance and trust to customers

Aside from tax evasion, HMRC must act where there is a necessary and serious need to improve record keeping. At the end of the day, poor record keeping is one of the top five reasons why businesses fail so it is in small business’ interests to get their books into shape. Not only will this help small businesses to avoid unnecessary fines, but more importantly, it will help them to run their businesses more successfully. With more effective bookkeeping, small businesses will be able to take advantage of cash forecasting with reverse factoring invoices for example.

So, small businesses must get their books in order, fast. HMRC will simply not accept the excuse of “I didn’t realise I was eligible to pay VAT”, with so much information being pushed out to UK businesses. Following the VAT registration notification on 30th September, 31st December will be the final deadline to send in the VAT application form with full accounting figures.

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