Why am I being asked by HMRC to provide a security payment for my VAT?

If HMRC think that you may not comply with your VAT obligations based on your compliance history in either your current or a previous business, then you as a taxable person may receive a Notice of Requirement for a security payment to be made. The legislation for this s Schedule 11 para 4(2)(a) VATA 1994

Often a warning letter may be issued beforehand, but if HMRC thinks that a warning letter may increase the risk of VAT not being paid it will go straight to issuing a Notice of requirement.

The amount of security is calculated by using a formula approved by independent tribunals and based on what HMRC see as being the most accurate information available to them at the time. It’s worth noting that although the amount of VAT in arrears is used in calculating the security required, this does not affect the arrears. HMRC will still be seeking payment of the arrears in their usual way.

If you are issued with a Notice of Requirement to give security you must immediately make a full payment as detailed in the notice, if you do not, then it’s treated as a criminal offence to carry on trading (making or receiving taxable supplies) and HMRC may prosecute and fine up to £20.000 for each taxable supply made.  If the taxable person is a business which continues to trade without giving the full security, HMRC may prosecute each individual involved in that business and hold them personally responsible for paying any fines and compensation awarded by the courts.

Sometimes HMRC may instruct the taxable person making quarterly returns to change over to filing monthly returns, you can also ask to move over to monthly returns.

Security is held for 12 months for a taxable person on monthly returns and for 24 months for those on quarterly returns. During this time HMRC will monitor the businesses tax affairs and will return the security when it considers the risk of regarding non payment of VAT due or may become due in the future has stopped.

VAT due to HMRC is still due even if you make a security payment to HMRC. These arrears still need to be paid, so if HMRC uses your security payment to settle these debts, further security will be required.  Time to pay arrangements may be negotiated and if agreed HMRC will consider withdrawing the notice of requirement to give security.

When there is no longer a risk that VAT will be paid HMRC will first check if there are any other debts with HMRC and use the security to pay those debts before returning any balance to the taxable person.

If you disagree with HMRC’s decision to give security you can appeal for an independent review or go straight to an independent tribunal and you have 30 days from the date on the notice (or date of letter from the review decision if you go down this route).

Further information on this can be found in the leaflet  SS FS2a