The government wants businesses to make more use of electronic invoicing to combat VAT fraud and enhance tax collection.

E-invoicing is where invoices are created, sent, received and processed in a digital format, with the e-invoice containing exactly the same information as a traditional invoice.

With more than half of the Organisation for Economic Co-operation and Development (OECD) countries having mandated e-invoicing, the UK is seriously lagging and even still allows paper invoices. The government plans to carry out a consultation, the details of which are scarce.

Benefits of e-invoicing

Even though UK mandation almost certainly remains some way off, you will probably need to use e-invoicing if your business operates internationally. Even if this is not the case, there are still benefits to early adoption:

• With a standardised and structured format, e-invoices can be processed faster and with fewer errors. Invoices sent to a buyer can be tracked in real time, and the number of invoice rejections and disputes considerably reduced.
• Duplicate invoices are avoided, and fraudulent activity will be largely prevented since it will not be possible to intercept invoices to change bank details.
• Invoices, both sent and received, will be processed immediately, so cashflow forecasting will be improved and working capital requirements better managed. Faster payment of invoices received will ensure prompt payment discounts are taken advantage of.

Apart from the more obvious benefits, the relationship between buyer and supplier should improve, leading to higher customer retention and satisfaction.

Implementation of e-invoicing

Based on what has happened in other countries that have adopted e-invoicing, the implementation process can take at least three years. The usual approach is for a phased roll-out, with larger businesses required to comply first.

With mandatory e-invoicing likely for the UK, businesses should start preparing as early as possible. Rather than developing their own e-invoicing solution, many businesses will prefer to work with an e-invoicing service provider. Take care in the selection process to ensure that future e-business needs will be fully met.

Guidance on selecting the right e-invoicing service provider can be found here.

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HMRC has launched a new digital tool to help businesses estimate the potential impact of their VAT registration. This will be useful for established business owners and those planning to start a business.

VAT registration

Registration for VAT is required if a business’s taxable turnover (including zero-rated sales) exceeds £90,000 for the previous 12 months or is expected to exceed this threshold in the next 30 days.

For a business that only makes sales to the general public, the cost of VAT registration can be particularly onerous if it is not possible to increase prices to cover the VAT charged while the cost of VAT on sales becomes an additional cost for the business.

However, a business supplying VAT-registered customers may find it beneficial to register voluntarily even though turnover is below £90,000.

Using the estimator

The estimator tool can be used as many times as needed, with HMRC suggesting it will take around 20 minutes to complete on first use. To use the estimator:

• Select the time period – in months – for the VAT estimate.
• Enter business income for the period, excluding any income from employment.
• If any income is exempt from VAT, zero-rated or at a reduced rate, estimate the appropriate proportion in each case.
• Enter business costs, including those outside the scope of VAT such as salaries.
• Remove the proportion of costs outside the scope of VAT, exempt from VAT, zero-rated or at a reduced rate.
• Then a final, but very important question, about how VAT will be accounted for – added to selling prices or absorbed into current prices.

Running the numbers for a VAT-registered business that has gone £10,000 over the registration threshold (standard rated sales of £100,000) with £10,000 in standard rated expenses, and with all sales to the general public, results in the business being £15,000 worse off annually compared to not being VAT registered. Take into account the extra tax and NICs due on the £10,000 of additional income, and it is clear the business would probably have been better off trying to stay within the £90,000 threshold.

HMRC’s VAT registration estimator tool can be found here.

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HMRC is moving ahead with its ‘digital by default’ ambition by pushing VAT registration to online only. Any business unable to use the online registration service will have to call HMRC’s VAT helpline to obtain a paper registration form.

According to HMRC, more than 95% of businesses already register online, but there are some circumstances when registration by post is the only option.

HMRC recently made an almost immediate U-turn after concerns were raised when it tried to remove the option for downloading paper self-assessment tax returns. the forms continue to be available to download.

Paper-only option

Online registration is not possible where a business wants to:

• Apply for an exemption from VAT registration (where turnover has gone temporarily over the registration threshold);
• Join the agricultural flat rate scheme; or
• Register a company’s divisions or business units separately for VAT.

In these circumstances, businesses must contact HMRC’s VAT helpline to ask for a VAT1 form. The digitally excluded will need to do likewise.

Other registration issues

The compulsory VAT registration threshold has been frozen at £85,000 since 1 April 2017, so not surprisingly the number of new registrations has risen considerably – over 300,000 in each of 2020/21 and 2021/22. The threshold will remain unchanged until 31 March 2026.

With more smaller businesses being drawn into the VAT net, it doesn’t help that HMRC closed its VAT registration helpline earlier this year. Anyone with a registration query can now end up waiting well over a month before HMRC responds.

Currently, it can take HMRC 30-40 working days (although sometimes longer) to process an online VAT registration. However, VAT must still be accounted for from the date when the obligation to register arose, so sending out invoices in the interim can be problematic.

HMRC’s guide to VAT registration can be found here.

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The 50^th anniversary of the UK’s introduction of VAT was earlier this year, but despite being around for a while, many VAT-registered businesses still find VAT too complex and confusing. No surprise then that more businesses than ever are getting hit with penalties for inaccuracies.

Inflation and frozen thresholds

Two things that are not helping are the high rate of inflation combined with a freeze on various VAT thresholds.

Since 2017, the registration threshold has been £85,000, so with increased prices it is easy for a business to become liable for VAT despite staying the same size.

Meanwhile the thresholds for remaining within the flat rate, cash accounting and annual accounting schemes, have remained virtually unchanged for around 15 years, so, again, it is easy to mistakenly continue with a scheme when no longer eligible to do so.

Beware penalties

With HMRC aiming to close the tax gap for VAT, the risk of penalties for inaccuracies will only increase; for 2021/22, the number of penalties issued was already substantially higher than for the previous year, a trend which is sure to continue.

HMRC is able to charge a penalty of up to 30% of the extra VAT due if an error arises due to lack of reasonable care.

In HMRC’s view, it is reasonable to expect a business to find out about the correct VAT treatment or to seek appropriate advice when encountering a transaction with which they are not familiar.

A get out of jail card?

Incurring such a penalty is somewhat careless. However, there may be a get out of jail option if this arises.

HMRC have the discretion to suspend a penalty, for period of up to two years, during which time a business must comply with certain conditions. The aim is to prevent further penalties in the future, so a business could, for example, be asked to improve its record keeping.

If this is done, the penalty will be cancelled at the end of the suspension period, but best to avoid such a scenario in the first place.

HMRC’s guidance on VAT errors can be found here.

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