VAT penalties - watch your step
As part of HMRC's tightening up on accuracy, so-called ‘minor' errors on a VAT return can incur a penalty. Littlejohn VAT manager Luigi Lungarella explains.
You will be aware that in 2008 HMRC introduced a new penalty regime for most taxes. We now learn that its staff have recently undergone intensive training - thought to be with a view to maximising the penalty yield. Soon the coffers are likely to swell further, when the regime is extended to cover customs duties.
The size of the penalty depends on the severity of the error, and can be mitigated by ‘unprompted' disclosure by the taxpayer and/or the circumstances under which the error arose. Nevertheless, if HMRC has already advised it will be inspecting the taxpayer's records, this counts as a ‘prompted' disclosure and mitigation won't apply.
How penalties are applied
Penalties range from a ‘careless' error (0 to 30% of the ‘potential lost revenue'); to a ‘deliberate but not concealed' error (20% to 70%); or a ‘deliberate and concealed' error (30% to 100%).
No penalty applies if HMRC considers the taxpayer has taken ‘reasonable care'. Reasonable care is not defined and is subjective. But HMRC takes into account the circumstances and the capability and experience of the person concerned.
There is a further penalty of 30% for failing to notify HMRC within 30 days that a submitted tax assessment is understated.
A penalty can be suspended for two years, and subsequently cancelled, if the taxpayer doesn't make any further errors relating to tax covered by the regime.
VAT returns
All this has been widely publicised, but you may not be aware that ‘minor' errors posted to the VAT return following discovery are also covered by the penalty regime. These are aggregate errors of less than £10,000, or errors between £10,000 and £50,000 that do not exceed 1% of the value of sales posted tobox6of the VAT return.
However, the taxpayer needs to assess whether the error is ‘reasonable', ‘careless' or ‘deliberate'. If careless or deliberate, the taxpayer must notify HMRC regardless of the amount involved. The disclosure will qualify as ‘unprompted', provided HMRC has not already advised a visit will be carried out. But a penalty could still be applied, albeit at a reduced rate.
No escape
Many believe that HMRC views the penalty regime as an additional source of revenue. At the beginning of a VAT inspection, for example, the taxpayer is shown a document setting out his rights with regard to the regime under the Human Rights Act. He is asked if he understands his rights and a note of the response is made. This means the taxpayer will not be able to later claim he misunderstood when penalties apply.
For advice on this or other VAT issues contact Luigi Lungarella on 020 7516 2228, llungarella@littlejohnllp.com or Bob Jones on 020 7516 2295, rjones@littlejohnllp.com
