Case Study
We recently carried out a VAT review for a client in the hospitality sector who was unsure as to whether the VAT treatment they had used in their historic filings was correct.
The VAT treatment for the hospitality sector is complex, as different rates can apply depending on the nature of the business.
There was an added layer of complexity with this entity, in that they had traded through the period of COVID recovery, during which the VAT rates applicable to the hospitality sector were temporarily reduced, per the below:
- 5% from July 2020 to 30 September 2021
- 12.5% from 1 October to 31 March 2022
The client also had an arrangement with HMRC whereby they filed VAT returns on an annual basis, as opposed to the standard quarterly treatment.
We carried out a full review of the prior 3 years VAT filings, including:
- the rate of VAT that had been applied to sales throughout the period (ensuring to take into account the post COVID temporary reduced rates);
- the recovery of input VAT, at the correct rates
- ensuring that all input VAT had been claimed
- highlighted the VAT overpaid or underpaid over each of the three periods.
Our Recommendations
We recommended the following course of action:
- Across the three periods, the net effect of the VAT errors resulted in an underpayment of VAT
- Option 1 is for this underpaid VAT to be accounted for in the next VAT return by way of a correction. This is the normal course of action for errors of less than £10,000 of underpaid tax. The only downside for our client here was that they only file annually, so there is a significant delay between discovering the errors and informing HMRC. If HMRC were to raise an enquiry and discover the errors before they are corrected, they are more likely to raise penalties, as this would be classed as a prompted disclosure (ie HMRC found it before we told them). The benefit of this method is that there is no additional cost incurred by the client to correct (ie no professional fees).
- The other option, and our preferred route, is to complete a form VAT652 and submit this to HMRC. This will of course mean the error is corrected much more quickly and HMRC will class this as an unprompted disclosure and are much less likely to raise penalties.
- We also recommended that the client checked the settings within their bookkeeping software to ensure that all sales are now recorded at 20% to prevent further errors arising in the future.
- Finally, there are some special VAT schemes that apply to the catering industry (such as the retail scheme or the catering adaption). So we recommended that TaxGem™ should perform a full review of the schemes, how they apply to the business and what the potential savings might be.
Overall a super positive outcome (despite there being errors…because finding them meant we could put it right) and a much more robust VAT return preparation process going forward - Winner!
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