Office address: 33 George Street, Wakefield WF1 1LX
Tel: 01924 376045
Office address: 33 George Street, Wakefield WF1 1LX
Tel: 01924 376045
Although some of the penalties for VAT infringements have been less severe in recent years, there is still an alarming array of enforcement powers to trap the unwary. By being aware of the problem areas and planning carefully, it should be possible to avoid becoming an unwitting victim of the system.
You must notify HMRC of your liability to register for VAT if your taxable turnover has exceeded £85,000 in the last twelve months, or if you believe it will exceed £85,000 in the next thirty days alone (ignoring past turnover).
Where notification is late a failure to notify penalty will be charged unless there is a reasonable excuse for the delay. The penalty is a percentage of the tax unpaid (the 'potential lost revenue' or 'PLR') due to failure to register at the correct time. It will be:
Each of the above penalties can be mitigated at HMRC's discretion, the levels of mitigation depending on whether the disclosure was prompted or unprompted, as follows:
However, if the penalty is chargeable at 30% it will be cancelled if the trader notifies HMRC within 12 months after his required registration date.
Every VAT registered business needs to ensure that it is organised to deal with VAT correctly and on time:
A default occurs if HMRC has not received all the VAT due on a return by the due date. Now that all VAT-registered business must file returns and pay any VAT due online, the due date is 7 days after the end of the month following the VAT period end. For example, if the VAT return covered the quarter to 31 March, the due date would be 7 May.
You receive a warning after the first default - the Surcharge Liability Notice (SLN). Do not ignore this notice. If you fail to pay the VAT due by the due date for any returns due within the next year, the surcharge will be 2% of the outstanding tax. The surcharge increases to 5% for the next default, and then by 5% increments to a maximum of 15%. Lower rate (2% and 5%) surcharge assessments will not be issued for less than £400. At rates of 10% and 15% the surcharge liability becomes subject to a minimum charge of £30.
Each default, whether it is late submission of the return or late payment, extends the surcharge liability period, but only late payment incurs a surcharge. You only return to the beginning of the surcharge cycle when you have submitted and paid a whole year's worth of VAT returns on time since the previous default.
Businesses with qualifying turnover up to £150,000 will be sent a letter offering help and support following the first default rather than a SLN. This arrangement is intended to allow extra time to sort out any short-term difficulties before formally entering the default surcharge system. Any further default within twelve months will result in the issue of a SLN.
Late payment penalties (but not late filing) will be avoided if the taxpayer has agreed a time to pay arrangement with HMRC.
It is understood that from a date yet to be decided the default surcharge is due to be replaced by a new system, which will penalise late payment of VAT and late-filing of returns separately. However, no commencement date has been announced for these changes which were legislated several years ago.
The manner of notification to the VAT office depends on the quantum of the error.
Cumulative net VAT errors of £10,000 or less discovered during a VAT period may be included in the VAT return for that period, as may net errors between £10,000 and £50,000, which do not exceed 1% of the Box 6 figure for the same VAT period. Net errors exceeding those limits must be notified separately by completing form VAT 652 or by writing to HMRC. Deliberate VAT understatements must always be notified on form 652.
The penalty does not apply where the taxpayer has, in the view of HMRC, taken reasonable care in filing returns but makes an innocent mistake. Where it does apply, it is calculated as a percentage of 'potential lost revenue' ('PLR') as follows:
Where a penalty is due because of an under-assessment in the absence of a return, it is at 30% of PLR.
Reductions are available for unprompted disclosures, assistance give to HMRC and allowing full access to records, and some penalties for careless errors could be suspended on the condition that certain improvements are made, such as to record-keeping. The amount of the reduction is at the discretion of HMRC, but maximum reductions are as follows:
For unprompted disclosures:
For prompted disclosures:
An additional penalty is also applicable to the unauthorised issue of VAT invoices, e.g. where a person not registered for VAT issues an invoice showing an amount purporting to be VAT. HMRC will be able to recover the amount shown as if it were VAT, and apply a penalty as follows:
The period for retaining records is six years. There is a fixed penalty of £500 for breaching this requirement.
The amount of the penalty varies with the type and frequency of the breach involved. The basic penalty is £5 per day while the breach continues. This is increased to £10 per day if there has been an earlier breach of the same regulation within the previous two years, and £15 per day if there has been more than one earlier breach.
In some cases, this basic daily penalty is increased to a daily percentage of the tax involved, if this is greater. The percentage rises in line with the number of previous breaches, in exactly the same way as the basic daily penalty. The possible percentages are 1/6%, 1/3% and 1/2%.
Daily penalties are subject to a maximum of 100 times the daily amount.
Interest on tax will arise in certain circumstances, including cases where:
Where an assessment covers a period exceeding three months, HMRC is required to break it down into return periods. This is necessary to establish the period for which interest is to be charged. Normally, interest accrues from the due date for submission of the return for the period concerned. However, the maximum period is three years, although interest will continue to run on assessments remaining unpaid after thirty days from the date of issue.
The rate of interest is set by the Treasury and is broadly in line with commercial rates of interest.
Appeals against assessments, penalties and the amount of interest charged may be made. The first appeal is for a local, independent review by HMRC, then if needs be, to the First-tier Tribunal. HMRC offices and the tribunal have powers of mitigation in appropriate circumstances. Where the appeal is against the imposition of interest, penalties, or surcharge, the tax (but not the penalty, interest or surcharge) must usually be paid before an appeal can be heard, unless the appellant can demonstrate that paying it would cause financial hardship.
The tribunal is given the authority to increase assessments that are established as being for amounts less than they should have been.
A formal procedure is now established for appeals to be settled by agreement. This agreement must be in writing, and there is a thirty-day cooling off period during which the taxpayer may cancel the agreement.
HMRC has extensive powers to obtain information. It can enter premises and gain access to computer systems and remove documents.
A walking possession agreement can arise where distress is levied against a person's goods.
None of the above penalties or interest is allowable as a deduction when computing income for corporation or income tax purposes.
If in doubt, contact us. It is important that you seek professional advice as early as possible. We can help you!
Tel: 01924 376045
Email: wakefield@jolliffecork.co.uk