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Steve Allen, Director of VAT Solutions (UK) Ltd, examines the forthcoming penalty regime for errors in VAT returns. 

Steve Allen

Introduction

You may have heard by now that HMRC are proposing to introduce a new penalty regime covering both direct taxes and VAT.  In this article, we provide an overview of how the proposed regime will work from a VAT perspective.

Penalties Will Not Always Be Charged

First of all, not every error will incur a penalty. If a person takes reasonable steps to complete a document correctly, even if it later turns out to be wrong, a penalty will not be due.

When Penalties Will Be Charged

A penalty is chargeable where any person gives HMRC an inaccurate document that satisfies two specific conditions as follows:

The first condition is that the inaccurate document either amounts or leads to:

• an understatement of the person’s liability to tax, or
• a false or inflated statement of a loss by the person, or
• a false or inflated claim to repayment of tax

The second condition is that the inaccuracy was careless or deliberate.

An inaccuracy made by a person in a document may be:

• a mistake made despite the person taking reasonable care, or
• careless, or
• deliberate but not concealed, or
• deliberate and concealed.

HMRC say that error penalties are designed to address the behaviour that led to the inaccuracy. Penalties for deliberate inaccuracies are, therefore, higher than those for careless inaccuracies. Within the 'deliberate' category there will be varying degrees of seriousness, and the law reflects this by providing for higher penalties in those cases where the person has taken steps to conceal the deliberate inaccuracy. 

Table of Penalty Rates

When Penalties May Not Be Charged 

Where a person makes a mistake despite taking reasonable care to get things right, HMRC will not charge a penalty. Examples might include:

• a reasonable view of the law that proves to be wrong
• an arithmetical or transposition error that is not so large (relative to overall liability) as to produce an odd result or be picked up by a quality check
• following advice from HMRC
• advice from a competent professional is followed but proves to be wrong despite the fact that the advisor was given a full set of accurate facts

Deliberate Intention or Carelessness?

Whether a person intended to make an error does not in itself prevent a penalty. If an inaccuracy in a document is due to carelessness, a deliberate act, or failure to act, the person will be liable to a penalty.

HMRC acknowledge that people’s ability and experience will vary, and the steps that a person takes to ensure a document is correct will depend upon the nature, size and complexity of their transactions. When an error is found in a document, the person should have the opportunity to put forward their explanation of how the error arose, and the steps they took in completing the document. HMRC will then consider whether it was reasonable for them to act as they did in light of their circumstances at the time they completed the document.

A deliberate inaccuracy occurs when a person intentionally makes an error in a document sent to HMRC. It can also be a failure to act, where this is done deliberately to avoid paying what is due.

For behaviour to be seen as deliberate, HMRC must have grounds to believe that the person intended to submit a document that they know is inaccurate.

Concealment? 

Any error that is not apparent on the face of a document could be seen as hidden, but HMRC will only apply ‘deliberate and concealed’ to cases of the most serious conduct. In these cases there will be more than an attempt to deliberately record an error in a document, there will be additional signs that active steps have been taken to cover it up either before or after the document is submitted.

There are two steps to consider for a penalty to be based on a deliberate and concealed inaccuracy.

• the error or omission was deliberate, and
• steps were taken to conceal the inaccuracy

Underassessments 

 HMRC will also charge a penalty where:

• an assessment issued by HMRC understates a person’s liability to VAT and
• the person fails to take reasonable steps within 30 days of the date of the assessment to tell HMRC that it is an under-assessment

In considering whether a penalty is appropriate in cases of under-assessment, HMRC must consider:

• whether the person knew or should have known, about the under-assessment; and
• what steps (if any) would have been reasonable for that person to take to tell HMRC about the under-assessment