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Staying the right side of the VATman

This VAT matters issue looks in detail at the VAT penalty and default surcharge regimes.

Background

To help ensure businesses remain compliant, HMRC have the power to charge penalties and surcharges in a number of different circumstances. HMRC use the penalty and surcharge regimes to encourage businesses to pay more care and attention to their VAT responsibilities, as in not doing so they will suffer a financial cost. Many businesses on the receiving end of this regime view HMRC’s use of the penalty and surcharge regulations as a stick rather than a carrot! Over recent years, we have increasingly seen more cases where HMRC have charged much harsher penalties than we have been accustomed to in the past.

Penalties

HMRC often send out penalty notices and these can be for a number of reasons. The current penalty regime allows HMRC to charge the following three penalties;

  • Inaccuracy penalties
  • Failure to notify penalty
  • Wrongdoing penalties

Inaccuracy penalties occur when a business has carelessly understated the amount of VAT payable, overstated the amount of VAT repayable, or failed to inform HMRC that an assessment they have made has understated the amount of VAT payable.

A failure to notify penalty will be charged where a business is compulsorily required to register for VAT but they fail to do so.

A wrongdoing penalty will be charged where an unauthorised business issues a VAT invoice, for example where a non-VAT registered business issues a VAT invoice.

Penalties are calculated based on the ‘potential lost revenue’, and also on the behaviour of the business in making the error and whether the error was discovered by HMRC or notified to HMRC by the business. The table below shows the penalty percentage rates that will be applied depending on the behaviour assessed.

Behaviour

Disclosure to HMRC

Minimum Penalty %

Maximum Penalty %

Careless

Unprompted

0%

30%

Careless

Prompted

15%

30%

Deliberate

Unprompted

20%

70%

Deliberate

Prompted

35%

70%

Deliberate and Concealed

Unprompted

30%

100%

Deliberate and Concealed

Prompted

50%

100%

It is possible to obtain a reduction from the standard penalty percentage by cooperating with HMRC. HMRC base the reductions on whether the business has cooperated by telling, helping and giving access to their records. It is advantageous to assist HMRC in their investigations as much as possible, however you should always be mindful not to give away information that is not relevant to their investigation.

If you become aware that you have made a mistake in a return that has been submitted, it is possible to amend the error on your next VAT return submission within certain value limits. If the error is more than the correction limits it must be notified separately to HMRC.

Once you become aware of an error, you should assess whether this error occurred due to a careless mistake or a deliberate action and also assess the value of VAT under or overstated. Depending on the value of the error, it may be possible to adjust for the error and not separately disclose the error details to HMRC. We would usually recommend declaring any error which is substantial in amount even if it is within the correction limits as this would mitigate your penalty position if HMRC became aware of a corrected error during a routine visit.

If you have made the error despite taking reasonable care, it should be possible to reduce any penalty charge down to 0%. You will be seen as taking reasonable care providing you have implemented comprehensive internal accounting systems and controls and the inaccuracy is not significant compared to the overall tax liability for the accounting period.

If you have been charged a penalty due to a careless error, HMRC do have the ability to suspend the penalty based on certain conditions. Providing the conditions are met for a set period, the penalty will no longer be payable. This can be useful where an error resulted from a process that can be revised to avoid the same errors occurring in future.

Conclusion

Even the most compliant business can sometimes be faced with a penalty or surcharge notice from HMRC. VAT is a complex tax which can sometimes trip up the unwary business owner. It is important to seek advice at the earliest opportunity.

If you have any concerns regarding compliance with VAT regulations or if you have been issued with any penalties or surcharge notices then we are here to help.

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