For years, it seemed that penalties were only issued for the most egregious inaccuracies – and in any case businesses could usually nullify any penalty simply by flagging the mistake themselves.
No longer. HMRC’s new iron-fist regime is still supposedly discretionary, but penalties are now so commonly issued they appear to be automatically generated.
HMRC is supposed to assess any significant errors on a VAT return before deciding whether a penalty should be applied.
But what we’re increasingly seeing is a skipping of this judgement phase, and penalties applied seemingly as a default. HMRC then decides whether the error is, in its opinion, careless or deliberate and whether the investigation was prompted (by it) or unprompted, with the penalty rates being higher for deliberate and/or prompted errors.
Yet a careless unprompted error, the least severe category, can still be subject to a penalty of 30% 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We’ve heard that on internal appeal 50% of penalties are withdrawn – suggesting these penalties should never have been issued in the first place.
For those that remain, the penalty can range between 30% and 100% 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 understand how to negotiate the suspension of a penalty.
But this is need-to-know stuff because – provided businesses meet the stipulated conditions – a suspension 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 no more errors are 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 the sale, your condition might be that you’ll sell no more used cars without accounting for 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 a knowledge of how the VAT penalty system works can therefore neutralise the impact of a penalty by asking for errors to be reclassified as careless rather than deliberate.
But it’s a flawed system. We’ve 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 meekly accept a VAT penalty without challenging it.
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