VAT penalty

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Client purchased batch of cars and due to software glitch they were processed as qualifying rather than margin vehicles. The loss to HMRC was £150 but they are demanding penalties based on the batch purchase price of £270,000 rather than their loss. Is this correct?

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By Anonymous Accountant
01st Mar 2024 17:01

I may be being dumb, it is nearly home-time on Friday, but how was the loss to HMRC only £150?

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VAT
By Jason Croke
01st Mar 2024 17:33

Just so the situation is understood.

Client sells a car, pays over output tax based on being a qualifying car - if car sold for say £12,000 then that is made up of £10,000 net + £2,000 VAT.

But the error was that the car was a margin scheme car and if car sold for £12,000 then the output tax was only £150, that being the VAT due on the margin between purchase price of the car and selling price of the car?
(ie, car was purchased for £11,100 and sold for £12,000 thus the margin is £900 and that £900 is deemed VAT inclusive and therefore £900 x 1 / 6 = £150).

If that example fits your client situation then it does look like client overpaid output tax to HMRC by £1,850 and in theory there shouldn't be a penalty as HMRC owes the client £1,850

Appreciate this is just an example.

What does the HMRC letter say? HMRC are required to show their workings and explain where they got their VAT loss from and certainly have to do this if applying penalties.

Is there more to this than meets the eye? Yes, HMRC could have got their numbers very wrong, but if HMRC are issuing penalties then that suggests they've assessed for something specific.

Where a trader is using the margin scheme and fails to maintain appropriate records, HMRC can reject your clients margin scheme calculations and force client to use normal accounting methods, could that be what is happening here?

See link here -
https://www.gov.uk/hmrc-internal-manuals/vat-margin-schemes/vatmarg10000

"HMRC has the discretion to impose record-keeping requirements in a notice, but has no discretion to vary those requirements in an individual case. If a business fails to keep the prescribed records, it forfeits its right to opt to use the margin scheme in relation to those transactions not properly recorded. Subject to the advice in the paragraphs below on Unsatisfactory records (This content has been withheld because of exemptions in the Freedom of Information Act 2000), this means that tax on those supplies is due on the full selling price and not on the margin."

If this is what is happening then it suggests HMRC thinks the issue is more than "just a glitch" and if HMRC have withdrawn use of the margin scheme, then going back to my example, your client owes £2,000 VAT (the original amount paid in error is now in fact the correct amount) and not £150 and if your client tried to amend their error via a VAT652 or directly on next return, this may be why HMRC are seeking the original qualifying VAT amount and not any adjusted amount.

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Replying to Jason Croke:
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By More unearned luck
01st Mar 2024 19:25

The OP says penalties are based on the purchase price of £270,000. My guess is that input tax was reclaimed of £45K or £54K and that the cars were sold, if they have been sold, in later period.

Is the OP sure that the glitch isn't GIGO, ie a human error? Or a human error caused by the human designer of the software (is it a spreadsheet?).

What definitely is a human error is the failure to sense check the return before submission. I assume that £270K of purchases in a quarter is material.

I agree more facts are required to give any answer other than one based on speculation.

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Replying to Jason Croke:
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By More unearned luck
01st Mar 2024 19:25

The OP says penalties are based on the purchase price of £270,000. My guess is that input tax was reclaimed of £45K or £54K and that the cars were sold, if they have been sold, in later period.

Is the OP sure that the glitch isn't GIGO, ie a human error? Or a human error caused by the human designer of the software (is it a spreadsheet?).

What definitely is a human error is the failure to sense check the return before submission. I assume that £270K of purchases in a quarter is material.

I agree more facts are required to give any answer other than one based on speculation.

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Replying to Jason Croke:
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By BenG
02nd Mar 2024 14:36

To simplify, if car purchased for £12,000 and sold for £11,900. Under margin scheme HMRC receives £0.00 .
If treated as qualifying car, input tax claimed £2,000 output tax 1983.33 loss to HMRC £16.66 .
Should penalty be based on input tax overclaimed or tax lost by HMRC

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Replying to BenG:
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By FactChecker
02nd Mar 2024 17:33

Are you saying that ALL the cars were sold at a loss?

As I said before (although it appears below here in the garbled chain of messages) ... "If the real story is any different, OP, then feel free to enlighten us ... facts matter."

Can you not explain what you mean by the "software glitch" (i.e. what should have been and what actually was submitted in the VAT returns)? Guesswork isn't helping any of us ...

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Replying to BenG:
VAT
By Jason Croke
02nd Mar 2024 19:59

BenG wrote:

To simplify, if car purchased for £12,000 and sold for £11,900. Under margin scheme HMRC receives £0.00 .
If treated as qualifying car, input tax claimed £2,000 output tax 1983.33 loss to HMRC £16.66 .
Should penalty be based on input tax overclaimed or tax lost by HMRC


If client treated cars as qualifying in error, that means client reclaimed £2k of VAT they were not entitled to reclaim (using your example).

The fact that the correct position is Nil VAT is due if treated as margin scheme supplies is irrelevant. HMRC don't net off the error from the correct position.

Did your client reclaim £2k? Yes.
Was client entitled to reclaim £2k? No
Does client have proof of input tax that allows them to reclaim £2k? No.

HMRC will assess penalty on client for £2k because client tried to reclaim VAT they weren't entitled to. The fact the true VAT position is Nil doesn't matter.

What if the glitch was never spotted? Client would happily keep input tax it wasn't entitled to or if it had spotted the error and filed a VAT652 then there would be no penalty (unprompted disclosure) but as penalties are involved then it suggests HMRC spotted this (prompted disclosure), probably when client filed a VAT return for a big refund with no output tax, likely triggering an inspection.

Same approach with a client who zero rates exports but doesn't have the proof of export, HMRC will assess for VAT until client gets the proof and even then, HMRC will accept the evidence and not want any VAT on the sales but will argue as the proof of export is late (evidence of export required within 3 months of export), HMRC will assess penalties based on the VAT that was due for the period client doesn't hold export evidence, so say you zero rated exports for £10k, no evidence, HMRC will assess for £2k then when evidence of export given, will cancel the £2k assessment but still issue a penalty based on the £2k even though £2k is not due.

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By FactChecker
01st Mar 2024 17:49

That's some excellent hypothesising from Jason ... based on his expertise but also some guesswork as to what actually happened at client (and what the penalty demand says).

If the real story is any different, OP, then feel free to enlighten us ... facts matter.

Thanks (3)
Replying to FactChecker:
VAT
By Jason Croke
01st Mar 2024 19:01

FactChecker wrote:

That's some excellent hypothesising from Jason ... based on his expertise but also some guesswork as to what actually happened at client (and what the penalty demand says).

If the real story is any different, OP, then feel free to enlighten us ... facts matter.


I do enjoy a good puzzle to figure out.
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By VATs-enough
02nd Mar 2024 19:24

Its all a bit of guesswork but worth thinking about 'careless' and 'suspension' ?

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