They are able to request a bond in two specific circumstances:-
- If their repaying a VAT claim represents a risk to the revenue, or
- VAT is at risk of being unpaid by your business.
Our experience of these bonds is, unsurprisingly, the latter situation. Often it is where directors of a company that has been in financial difficulty start a new business, or where a business has failed to maintain agreed payment plans for its VAT.
As mentioned, the law enables HMR&C to require an amount of security if they consider there is a risk of tax being unpaid by your business. Examples of this are:-
- That either a previous or the current business failed to comply with its VAT obligations.
- That a business has previously been prosecuted or penalise for a VAT offence.
It is worthwhile bearing in mind that if they think that there is a risk of a business defaulting on the VAT, HMRC do not need to give any warning of the requirement although they will issue a ‘Notice of Requirement’. The amount they require will vary particularly depending on how often the business makes returns and payments. If the business pays quarterly, HMRC will require a bond based on 6 months VAT, whilst if the business pays monthly the bond will be based on 4 months worth of VAT.
To continue to trade without providing the bond can be very expensive. It is a criminal offence and each taxable supply made is liable to a fine of up to £5,000.
HMRC will hold the bond as long as they feel that there is a risk but advise that they will review it within 12 months for monthly payers and 2 years for quarterly payers.
You can appeal against the bond, but the penalties for trading without a bond still hold during the course of the appeal often meaning that it is impossible to trade during this period.
HMRC are very magnanimous in what they will accept as the bond:-
- Cash or bankers draft
- Performance bond from an approved financial institution which is payable on demand
- A joint bank or building society account.
This security for VAT liabilities has been around for a long time, and I am sure that in the days to come we will see it being used more often.
Should your clients be asked for a bond and be unable to comply, they may well need advice on their financial position. We at Portland Business & Financial Solutions specialise in giving advice to those in financial difficulty. If any of your clients are in financial difficulty and would like specialist advice, please contact me (01202 712815) or Mike Fortune (01202 712811).
Senior Manager (Poole Office)
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