Small businesses, including many advisory firms, have found themselves at the wrong end of a tax-take after HM Revenue & Customs clamped down on VAT abuse.
HMRC’s VAT take increased 51 per cent between 2011-12 and 2012-13.
Kevin Igoe, managing director of business and individual insurance company PfP, said HMRC’s crackdown had been particularly onerous for small firms, with the amount of additional VAT raised as a result of HMRC inspections rising from £3.5bn to £5.3bn over that period.
He said that over three years, local HMRC investigations over small firms had taken an extra £8.4bn in VAT, more than double the £3.9bn from its scrutiny of big businesses.
Mr Igoe said: “We are seeing an increase in VAT compliance activity across the board, including IFAs, who should not feel they are immune from this activity. Failure to correctly deal with VAT, even if not deliberate, could result in hefty interest and penalty charges.”
He said some small-firm IFAs may not be fully aware of the need to demonstrate to tax inspectors that they are doing intermediary work, which is VAT exempt.
This will be academic for small IFAs whose taxable turnover falls below the threshold, which rose from £79,000 to £81,000 from 1 April 2014.
Alan Solomons, director of London-based Alpha Investments & Financial Planning, called VAT a “minefield” and said: “If an IFA advises a client directly and is liable for VAT, the adviser should pass this charge on to the client.
“There is also a need to ensure reviews and ongoing services are included in a contract up front with a new client. If wrapped up in one contract, these are considered intermediary services and are exempt from VAT. If separated from the original contract, they may not be considered VAT exempt.”
