VAT Penalties

You will be aware that we are well into the new penalty regime. FA 2007, Sch 24 took effect from 1 April 2008. The overall aim was to make penalties across all the taxes consistent and, therefore, fair. HMRC’s own summary was: ‘HMRC should support those who seek to comply, but come down hard on those who seek an unfair advantage through non-compliance.’

Thus the new penalties consider the taxpayer’s behaviour, as far as that can be ascertained, at the relevant time. Was there reasonable care? Was the error deliberate? Was the error concealed? The answers to those questions provide the Officer with the basis of the penalty percentage band to be applied.  He needs to ask the appropriate questions, and make careful note of the answers.

Reasonable Care

Where the taxpayer can demonstrate that he took reasonable care, no penalty will apply. HMRC have indicated that, to fulfil this defence, the taxpayer:

• will have adequate records;
• will research events that are unusual, to ascertain the correct VAT position; and
• will draw HMRC’s attention to entries that he is uncertain about.

Reasonable care depends on the scale and resources of the taxpayer organisation.  One of my concerns is that HMRC frequently ask too much of smaller businesses, who have little resource to undertake complex VAT research and analysis.

Disclosure

Penalties can be reduced by disclosure to HMRC. In particular, an unprompted disclosure may lead to a significant reduction in the quantum of the penalty. The taxpayer is deemed to disclose an error by:

•  telling HMRC about it;
•  giving HMRC assistance in quantifying the error; and
•  allowing HMRC access to records to check that the error is properly corrected.

Additionally, HMRC will take into account the timing, the nature, and the extent of the disclosure.

This is an important provision, as it encourages the responsible taxpayer, who finds an error, to put it right.

Suspension

One of the problem areas that has arisen is that of suspension. One option open to the assessing Officer is to suspend the penalty, rather than issue it immediately. This is supposed to happen where there is a genuine risk of the penalty re-occurring.

Officers are tending to use the suspension option more widely than HMRC had expected; often this is to avoid making a decision as to the quantum of the penalty. I understand that senior HMRC managers are addressing this issue. We are therefore likely to see more penalties issued immediately.

Another related issue is that the suspension conditions are frequently considered too onerous. The taxpayer should therefore consider paying the penalty instead!

Conclusion

I have to say that the new penalty regime is, in principle, very sensible. However, the multi-levels of complexity make it difficult for Officers to operate, and difficult for taxpayers to understand.