Client received a one-off payment from a tenant in relation to the tenant exercising a break clause on a lease. Client booked the receipt into sundry creditors, while its solicitors were asked to review the situation. Meanwhile, the funds received were not included on the VAT return for the period, which resulted in an understatement of around £60k on their VAT return. The error was discovered around 2 weeks later, as part of the standard quarterly process for preparing reports for the board, and a voluntary disclosure was made. Unfortunately, HMRC rang during this period to arrange a control visit and now argue that this automatically means that the company's disclosure was prompted, which results in a minimum penalty of 15% of the potential lost revenue of £60k.
So far, they have been unimpressed by my two arguments:
- As the tax point was created by the receipt of the funds and as no invoice was issued until after the mistake was identified, the tenant would have been unable to recover their input tax until after the voluntary disclosure was made. This means that there was not at any time any potential lost revenue.
- The error was identified at the earliest opportunity - which was the review of all accounts that takes place in connection with the quarterly accounts production process. In effect the penalty is only not reduced to zero because the company had a compliance visit scheduled and the company is being penalised for making a prompt disclosure.
I would appreciate any thoughts people have on whether these defences have legs, and on where I should go from here. I just find it astonishing that an error in one entry, discovered and disclosed two weeks later, should result in a penalty of £9,000.