HM Revenue & Customs has admitted that its clampdown on fraud is now delaying VAT registrations for all new companies.
UHY Hacker Young, the Birmingham accounting firm, says the delays are putting legitimate business transactions in jeopardy, and making new business start-ups more difficult and fraught with delays.
In a statement HMRC admitted that VAT registrations were now taking up to 12 weeks to complete.
According to UHY Hacker Young, a few years ago it would take typically just two to three weeks to receive a VAT number. Speedy VAT registrations can be essential since businesses with a turnover above the VAT threshold without a VAT number can face severe restrictions on their capacity to trade.
Malcolm Winston, partner, said that even a routine VAT registration in a non-risk sector is now taking eight weeks plus.
He commented: "They need to look at their processes and solve their manpower problem urgently. It is now taking a fortnight just to get an application logged on to the system.
"Yes, they do need to take measures to protect against fraud and are trying their best to do so, but this is causing a lot collateral damage to legitimate businesses so sympathy for HMRC’s position is eroding fast.
"Add to this the delays businesses encounter because of money laundering legislation and the environment for startups is becoming very unfriendly.
"Not having a VAT number can stop a business from trading – it’s as simple as that. Business partners often refuse to deal with unregistered businesses and many property deals in particular cannot be completed without a valid VAT number, as the legislation requires a VAT registration to be effective from certain deadlines, and buyers or sellers quite reasonably want confirmation before they proceed.
"The delay in VAT registration and interminable checks on legitimate VAT repayments can cause serious cashflow problems, and some businesses have folded as a consequence with employees losing their jobs."
UHY Hacker Young says the crackdown by HMRC on carousel fraud, in which fraudsters exploit EU rules to defraud the Revenue of VAT to which they are not entitled, has also imposed a significant red tape burden on small businesses.
Legislation introduced in the Budget entitles HMRC to withhold VAT from innocent businesses in circumstances where it believes they ‘should have known’ customers or suppliers were engaged in fraud.
Mr Winston said: "Businesses are expected to devote time and resources to doing detective work on behalf of HMRC, but without clear guidance as to how much due diligence is expected, there is a tendency for businesses do far more than is strictly necessary just to cover their backs."
For example, businesses are now hiring foreign law firms to verify the identity of directors of overseas trade partners, and in one instance a client of the UHY Hacker Young group felt it necessary to go to Sweden in person to check the passport of a company director.
"HMRC’s attitude is that businesses must prove a negative – that their customers and suppliers are not fraudsters," said Mr Winston. "In addition, HMRC are of the view that this applies to the entire supply chain, not just to the immediate supplier and customer a business is contracted to.
"Legitimate businesses feel they have to go to absurd lengths to establish the credentials of customers and suppliers because in most cases losing 17.5 per cent VAT will wipe out their profit margin."