Common challenges with EC Sales Lists
Neil Warren answers some common questions asked about EC Sales Lists (ESLs) to ensure that penalties are avoided.
The first-tier tribunal recently decided that HMRC was correct to charge two penalties to a business which sells guitars for failing to submit ESLs on time. AGC Customs Ltd (TC05267) claimed that the returns had been posted before the deadline dates but had been lost in the post.
An argument was also raised that the penalties totalling £1,280 were for ‘an extortionate amount’ but the argument of proportionality was doomed to fail, as was the postal argument. As the tribunal noted: “that the post should fail to deliver on two consecutive occasions is highly improbable.”
Failure to submit past returns
What happens if a business which has been selling goods or services to EU business customers for many years, but has never submitted ESLs? This situation would normally only occur for a business selling services because the sale of goods is recorded in Box 8 of the VAT return, and would therefore trigger an ESL request from HMRC.
Should the business submit the ESL returns for the current and future periods, or is it necessary to go back and complete them retrospectively? The answer is that all returns should be submitted where relevant sales have been made, but there is no need to submit a nil return for periods with no EU sales.
What about penalties?
If the retrospective ESL returns are all submitted, HMRC will not charge a penalty because they would not have issued a penalty liability notice, which always precedes a penalty.
Here’s how the penalty system works in practice:
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The deadline for submitting the ESL is 21 days after the end of the period if it is submitted online, or 14 days after the period end if it is submitted in paper format.
Say HMRC identify a business which needs to submit an ESL for June 2016. If the ESL has not been submitted by 21 July, they will write to the business giving it 14 days from the date of the letter to submit it. If the deadline is missed, a penalty of £5 per day will be charged until it is received by HMRC, to a maximum of 100 days.
If the June 2016 return is submitted on time, then a penalty of £5 per day will be issued if the September 2016 return is submitted late. This also applies if any ESL return is submitted late within the next 12 months, which is the default period. For a second offence a penalty of £10 per day is charged, and then £15 per day for future offences. All penalties are capped at 100 days. So a non-compliant business that is always late with its ESL could be fined £1,500 for a delayed ESL return (VATA 1994 s 66).
Errors on past ESLs
John is a sole trader computer consultant who sells his services to a Swedish business customer. He has discovered that he incorrectly showed sales of £1m instead of £1,000 to the customer on his ESL for March 2016. How should he correct the error?
If John submits his ESLs online, and discovers the error within 21 days of the submission date, he can make the correction online.
However, the 21-day correction period is not relevant here, so John must complete form VAT101B, which allows up to five errors on previous ESLs to be corrected. That form also allows previous omissions to be included (eg if a customer’s sales were missed off the original declaration) and also for lines on the original return to be deleted if appropriate.
Errors discovered by HMRC
If HMRC discover an error on an ESL return during a compliance visit, they will send the business a polite written warning if it is the first occasion on which a major error has been found. A formal notice will be sent on the second occasion of an error, if this occurs within two years of the first letter. Then if another major inaccuracy occurs within the next two years after the notice, the business is into a penalty situation. But the penalty will not break the bank – it is just £100, so definitely a light touch approach that only penalises the very serious and persistent inaccuracies.