Martin Telfer
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VAT - Voluntary disclosure penalty

VAT - Voluntary disclosure penalty

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.

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01st Feb 2011 10:57

Reasonable care

I think you will be able to demonstrate that you have taken reasonable care and manage to get the penalty withdrawn if not by the visiting officer then on review.  I don't think HMRC would very confident of winning this appeal in the tribunal.

I think the timescale is too narrow for HMRC to allege it was a 'prompted disclosure' and levy a 15% penalty. You can clearly demonstrate that this error would have been picked up during your review process.

Malcolm McFarlin

www.mandrtaxadvisers.com

 

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01st Feb 2011 13:08

Reasonable care

Thanks for the reply, Malcolm.  I have to say I haven't raised the question of reasonable care yet, as HMRC seem to take the view that any one off transaction should be investigated fully at the time.  I think now that it may be worth running the argument, particularly as I have now seen the HMRC guidance on 'Getting it right first time', which client seems to have followed fully. 

You didn't comment on the 'potential lost revenue' side of things and I wonder if I might be barking up the wrong tree on that one.  The primary legislation defines 'potential lost revenue' as being pretty much synonymous with 'net additional liability' and it does not appear to take into account corresponding under recovery of input tax by the other party.  Is that right?

Also, I notice in Schedule 24 paragraph 8 that 'potential lost revenue' for delayed tax should be 5% of the delayed tax for each year of the delay, yet client has been charged based on 100% of the delayed tax.  Any thoughts?

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01st Feb 2011 14:16

Reasonable care

Martin

You are correct in your assumption that 'the potential lost revenue' does not take into account the other party. HMRC are not interested in what the other party may or may not do.  Don't forget, unlike previous VAT penalties, the new penalty regime allows HMRC to suspend penalties.

I'm not sure if your client fits the criteria for 'delayed tax' as that really in my opinion relates to a business finding an error say a year later.

You will be on far stronger ground just opposing the penalty in full and at the very least asking them to suspend the penalty.

The penalty regime is relatively new and not many cases have been heard in the tribunals to put HMRC assessments to the test.

Malcolm McFarlin

www.mandrtaxadvisers.com

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02nd Feb 2011 12:43

Thanks, malcolm, for your thoughts on this.  I have replied to HMRC, focusing on the reasonable care aspects and on the review process that resulted in the error being found and disclosed.  I will add a post here when I hear back. 

I still find it amazing that their systems penalise more harshly someone discovering an error and reporting it promptly than someone who doesn't discover an error and waits for it to be detected. 

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