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Steve Allen of VAT Advisers Ltd comments on recent figures showing that more than half of VAT Penalties imposed by HM Revenue & customs are overturned on appeal

Introduction

In January 2011, the Financial Times published an article which reported that more than half of the VAT penalties issued by HMRC had been overturned on appeal. This was according to a recent study which indicated that HMRC’s penalty review procedure introduced in 2009 was making it easier to query their decisions.

What Does it Mean?

The fact that over half of the penalties were overturned suggests that some VAT Officers might be acting over-zealously, and issuing penalties inappropriately. Conversely, it could also mean that the penalty review procedure is being applied fairly by HMRC, and that taxpayers can have a degree of confidence in it.

According to official data obtained by UHY Hacker Young under the Freedom of Information Act, HMRC carried out 28,912 internal VAT reviews between April 2009 and September 2010. Out of this number, 16,270 decisions were then subsequently reversed. UHY Hacker Young said the figures were disturbing, with one of their VAT partners commenting that VAT Officers appeared to be handing out penalties like traffic wardens hand out parking tickets. He said he could understand a small percentage of penalties being overturned, but a rate of over 50% was staggering.

Penalty System Working Well?

HMRC has responded to the criticism by rejecting claims that its staff are under pressure to issue fines, stating that the majority of the penalties related to surcharges for late returns which were subsequently withdrawn or reduced because taxpayers had reasonable excuses for late filing. HMRC believes the statistics show that the internal review procedure was working well, with a spokesman commenting “The internal review process is there because we are listening to our customers. It saves unnecessary hassle in the long run.”
 
A similar pattern has emerged from the statistics covering all taxes during the first year of the review period. Just over half of HMRC’s penalty decisions and one-third of other disputed decisions were changed or cancelled upon review. HMRC said its assessment decisions were less likely to be reversed than late filing penalties because they resulted from enquiries and research made in advance of the decision. HMRC said that only a small proportion of the millions of decisions it makes each year are actually queried. Furthermore, the removal of a penalty after someone gives a reasonable excuse did not mean that the penalty was wrongly levied to begin with.