Avoiding VAT penalties – when paying a day late can cost you £300,000

22 May 2018

The courts play a vital role in bringing an independent view to the levying of penalties by HMRC. Penalties are levied if there’s an error by the taxpayer, and could be for late submission of a VAT return, failing to charge VAT or over-recovering VAT.

It’s strange to think that until the 1980s there were no penalties for innocent VAT errors. Now the error can be punished by up to 100% of the VAT in issue.

The fairness (or shield if we think in legal terms) for the taxpayer is behaving reasonably. Critically, this is not the same as making a genuine and honest mistake. Protection from penalties can be achieved either:

  • by illustrating to HMRC that reasonable care was exercised when preparing the VAT return and an error arose despite this; or
  • by convincing HMRC that there was a reasonable excuse for either the late submission or late payment.

Late Payment or submission of a VAT return – the ‘reasonable excuse’

If we consider the court’s view then it’s clear from a recent case, considering the levying of a 10% penalty for late submission of a VAT return, that there is no defence of proportionality in terms of the amount of the penalty. In this case a return paid one day late resulted in a £300,000 penalty. That seems pretty severe but the taxpayer could offer no successful reasonable excuse for the late payment.

The proportionality arguments have been well tested without success. This seems inequitable and offends the duty to act fairly – particularly when HMRC are only required to pay interest and not a proportion of the VAT due for a refund if they delay processing.

Errors in VAT returns – taking ‘reasonable care’

The definition of reasonable care depends on the specific circumstances and includes factors such as the size of the business, but it normally also includes taking professional advice, seeking a ruling from HMRC, consulting the relevant public notice etc.

In another case the tribunal rebutted HMRC’s proposition of penalties as the taxpayer had reviewed the relevant public notice and consulted their tax accountant. This was evidence of reasonable care.

So if reasonable care is exercised then the penalty should be avoided. It’s a shame that the Revenue can be aggressive in their application of penalties. If raised during a visit they will provide you with details of your rights under the Human Rights legislation, which can be unnerving.

Dealing with HMRC when opinions differ

One person’s view of reasonableness might differ from another’s and it is frequently the case that the taxpayer’s view differs from that of the authorities. HMRC officers are obliged to consider a penalty for every error they are aware of and if a penalty is deemed due then a taxpayer can request a review of the decision (there is a good success rate for this avenue). This is also a good option as it is free of charge. If HMRC confirm the penalty after review, then the remaining option is normally an appeal to the courts.

We have had a case where the officer levied a significant penalty when no VAT was at risk. The decision was confirmed on review and the penalty was only withdrawn when we lodged appeal papers with HMRC’s legal team. So ultimately the system did work but we had to press our case. The point to remember – take reasonable care and you have some protection.

If you need any advice with regard to your VAT return, or have any other VAT related queries, please don’t hesitate to contact me or fill out our contact form here.

Our VAT support service

If you’d like to take steps towards ‘reasonable care’, you may be interested in our VAT support service, more details of which can be found here.