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Surcharges for solicitor who ignored HMRC letters

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11th Aug 2016
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Neil Warren highlights key lessons from a case where the taxpayer ignored HMRC’s warnings and the VAT annual accounting scheme was withdrawn.

Annual accounting scheme

Taxpayers opt to use the VAT annual accounting scheme because they want the convenience of completing only one VAT return a year, instead of four. Once registered to use the scheme the business must make nine monthly payments on account of VAT throughout its accounting year, based on the total liability shown on its previous annual VAT return.

Withdrawal

HMRC has the power to withdraw a business from the annual accounting VAT scheme if it fails to comply with the scheme’s conditions, see VAT Notice 732, para 2.7, which include making each of the interium payments on time and in full.

Angela Spence (case TC05256) is a VAT registered solicitor who had used the VAT annual accounting scheme for some years. Her annual VAT return was due to 31 March but she failed to make the nine monthly payments of £3,150 for the year to 31 March 2013, and instead made “payments of £3,000 on a more ad hoc basis.” HMRC wrote to Spence on 8 January 2013 advising that her exit date from the annual accounting scheme was to be 28 February 2013.

Letters unread

As HMRC had confirmed Spence had been taken out of the annual accounting VAT scheme she had to file quarterly returns after 28 February 2013. However, Spence claimed that she never received the January 2013 letter from HMRC. She thus continued to pay VAT by instalments and didn’t complete quarterly VAT returns.

However, Spence did complete an eleven-month VAT return to 28 February 2013 (the withdrawal date) as if it was her usual annual return period to 31 March i.e. she failed to notice the date change from March to February.

Penalties

As Spence had failed to submit VAT returns and pay tax on time for all periods to 31 August 2014 she incurred six default surcharges, which in total exceeded £4,000. The last three surcharges were set at 15% of the tax due. All the surcharge notices were sent to her in writing by HMRC but it was not until January 2014 that the problem was noticed by her accountant.

Tribunal

The First-tier Tribunal believed Spence’s claim that she did not receive HMRC’s January 2013 letter. Also HMRC muddied the waters by writing to her again on 29 March 2013 with a letter that included the comment: “Because you use the annual accounting scheme”.

The tribunal agreed that Spence had a ‘reasonable excuse’ for not submitting the February 2013 VAT return on time but the surcharge clock started ticking from the next period. The total of £4,185 surcharges issued by HMRC was reduced to £2,281 by moving the clock forward by three months from February to May and recalculating the amounts due for each period.

The tribunal showed little sympathy and commented that Spence’s failure to properly read correspondence “did not amount to the required level of reasonable behaviour which we would expect of someone in her position. This is especially true of the three letters headed ‘VAT Notice of assessment of tax and surcharge and surcharge liability notice extension’, which we believe should have been enough to alert most prudent taxpayers to the fact that there was a serious problem which required to be addressed as a matter of urgency.”

Taxpayer behaviour

Spence completed her own VAT returns but she had a habit of just filing correspondence from HMRC instead of actually reading it. Perhaps she would have been wiser to forward all papers to her accountant as soon as they were received?

It was always going to be difficult to persuade a tribunal that she had a reasonable excuse for the late payments. The fact that she was a solicitor worked against her because legal professionals are used to dealing with a high volume of paperwork. The tribunal commented that it expected “a fairly high standard of care and probity towards such matters.”

Conclusion

Overall, the tribunal concluded that once she had received the notice dated 12 April 2013 about the late return and payment due for February 2013, she should have recognised there was a problem and taken urgent action. As the old saying goes…..you should nip a weed in the bud before it grows out of control. 

Replies (1)

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By MartinLevin
14th Aug 2016 12:19

The "ostrich syndrome" prevails. Why is it that the legally trained, who, in their turn, draft the laws, seem to think that they are exempt from it. Why can't these people work WITH those trying to represent them in matters outside a client's expertise?

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