Issuing penalties for inaccuracies on VAT returns is supposedly at HMRC’s discretion and, indeed, under the old regime, not only would you have to go out of your way to get a fine, you could nullify any penalty simply by flagging the mistake yourself.
Not any more. HMRC’s new iron-fist regime is still supposedly discretionary, but penalties are so commonly issued they appear to be automatically generated.
HMRC is supposed to assess any significant errors on VAT returns before deciding whether a penalty should be applied.
…penalties are so commonly issued they appear to be automatically generated.
But what we’re seeing is this judgement phase skipped and penalties applied seemingly as default. HMRC then decide whether the error is, in their opinion, careless or deliberate and whether it was prompted (by them) or unprompted with the penalty rates being higher for deliberate and/or prompted errors. As such, a careless unprompted error, the least severe category, can still be subject to a penalty of 30 per cent of the VAT amount in question. What we’re left with is a system that leaves no room for errors of any kind, and no brownie points for voluntary disclosure either.
We have heard that on internal appeal 50 per cent of penalties are withdrawn – quite clearly penalties that should obviously never have been issued in the first place.
What we’re left with is a system that leaves no room for errors of any kind, and no brownie points for voluntary disclosure either.
For those that remain, the penalty can range between 30 per cent and 100 per cent of the VAT due to HMRC but all is not lost – penalties for careless errors can be suspended by agreement with HMRC.
The problem is that, from our experience, businesses are either not made aware of this by HMRC, or don’t have a full understanding of how a suspended penalty is negotiated…
…penalties for careless errors can be suspended by agreement with HMRC.
But this is need-to-know stuff because provided businesses meet the conditions of their suspension – it effectively reduces a penalty to nil. Moreover, businesses can write their own suspension conditions, as long as they are acceptable to HMRC. If all conditions are met and another error is not made within the suspension period – usually 6-24 months – the penalty will not need to be paid.
The conditions might be as simple as meeting your filing obligations and not repeating the same mistake again.
For example, if you sold a second hand car, and didn’t account for VAT on sale, your condition might be that you will sell no more used cars without VAT during the suspension period. Only if you breached this condition would the penalty become payable.
The only possible way to avoid a penalty once issued is to push for a suspension. Businesses armed with the knowledge of how the VAT penalty system works can do this, effectively they are asking for errors to be reclassified as careless rather than deliberate.
But it’s a flawed system. We have seen as many blatantly deliberate errors reclassified as careless as we’ve seen genuine mistakes penalised without suspension.
With so little consistency from HMRC, no business should accept any penalty from HMRC without resistance.