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The UK is introducing a new system of penalties for errors in tax returns, including VAT refund claims. The new rules mean that traders could be charged a penalty if they don’t take reasonable care to make sure claims are correct.

HMRC can charge financial penalties for errors in claims which result in an overstatement of the amount of refund due. The new penalties apply to VAT claims made under the EC 13th Directive (86/560/EEC) by businesses based outside the European Union, for years commencing on or after 1 July 2008. They also apply to VAT claims made under the EC 8th Directive made by businesses based in other European Union member States, for years commencing on or after 1 January 2009.

HMRC will not charge a penalty if the trader can show that he has taken reasonable care in making his claim. Reasonable care includes:

• keeping correctly completed invoices, vouchers and receipts to support a claim and sending these to HMRC with the claim;
• maintaining and providing an up-to-date certificate of status or of business activity;
• checking what goods and services can be claimed for; and
• telling HMRC promptly about any mistake discovered after a claim has been submitted.

The penalties will be higher if the errors are deliberate.

The penalty rate depends on why you made the error. The less serious the reason, the smaller the penalty will be:

Reasonable care - No Penalty
Careless - Max 30% - Min 0%
Deliberate - Max 70% - Min 20%
Deliberate and concealed - Max 100% - Min 30%

You can find more information on penalties for errors, including what other UK taxes it applies to, at
www.hmrc.gov.uk/about/new-penalties/index.htm.