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Penalty notice

VAT penalty for tiny technical error

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27th May 2016
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Neil Warren considers a case where HMRC’s behaviour was slammed by the tribunal.

Many people don’t realise that HMRC has the power to issue a late registration penalty if the trader fails to tell them of a change in the legal entity of a business. This can lead to a serious penalty despite there being no loss of tax.

A typical case is where a sole trader takes on his wife or son as a partner, or incorporates the business and retains 100% of the shares. The potential banana skin is that if the trader fails to tell HMRC the business has changed from a sole trader to a partnership, they can issue a late registration penalty against the new business, although all VAT returns have been filed and all VAT paid by the previous owner.

The above scenario happened to J&W Brown [TC05101] and it did not show HMRC in a good light.

Mr J Brown (father) ran his business as a sole trader builder for many years, completed VAT returns and paid tax in a timely manner. He took on his son Kenneth as a business partner in November 2012, which amounted to a transfer of the business as a going concern (TOGC). But Brown failed to tell HMRC of the change in legal entity until July 2014. He continued to submit VAT returns and pay tax as a sole trader during this period.

HMRC treated the notification in 2014 as a late VAT registration by the partnership. As the delay in notification was more than 12 months, a penalty of between 10% and 30% becomes due for an unprompted disclosure. HMRC issued a penalty based on 18% of the VAT due by the partnership in this period.

That penalty was mitigated by a further 70% down to £582, to reflect the fact that the VAT returns and VAT due for the periods in question had been submitted and paid by Brown as a sole trader, meaning  there was no actual loss of tax for HMRC. However, HMRC asserted that two out of the six VAT returns were submitted late.

The tribunal noted that the issue; “was one of the merest technicality, a minor administrative hiccup, involving minimal culpability, causing no loss to the revenue, and no administrative inconvenience to HMRC.” And the judge added that what followed after the taxpayer voluntarily disclosed his error was; “significant inconvenience and expense. In order to resolve this issue, it will have caused the general taxpayer considerable expense far beyond the amount of the penalty.”

The tribunal reduced the penalty by giving a 90% discount rather than 70%, on the basis that Brown had only submitted only one late VAT return. The 18% penalty was reduced to 12.5% because more help had been given to HMRC than they had recognised. So the overall penalty was reduced from £582 to £100; a good outcome for the taxpayer.

Another concern highlighted by the tribunal is that HMRC was initially reluctant to engage in correspondence with the taxpayer or to consider the legitimate points raised by his accountant.

In reality, the penalty system based on taxpayer behaviour is not intended to penalise this type of oversight. In an ideal world HMRC would just process the paperwork on a belated basis and not think about penalties, especially when the taxpayer is happy to retain the VAT number of the previous business when there is a TOGC. This is done by completing form VAT68, as well as the usual VAT1 form to register the new owner (and VAT2 list of partners form if the new business is a partnership). The disadvantage of keeping the same number is that the new business takes over the potential VAT debts of the previous owner.

I hope that the critical comments of the tribunal judge will make HMRC more cautious in the future. A lot of the time and costs wasted by all parties could have been avoided.

Replies (1)

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By taxbakbristol
31st May 2016 13:13

That's not very likely - as I said earlier , STOP this silliness HMR&C and go after the BIG BOYS.

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