Tag Archives: penalty

VAT – What is Reasonable Care?

By   12 April 2018
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What is reasonable care and why is it so important for VAT?

HMRC state that “Everyone has a responsibility to take reasonable care over their tax affairs. This means doing everything you can to make sure the tax returns and other documents you send to HMRC are accurate.”

If a taxpayer does not take reasonable care HMRC will charge penalties for inaccuracies.

Penalties for inaccuracies 

HMRC will charge a penalty if a business submits a return or other document with an inaccuracy that was either as a result of not taking reasonable care, or deliberate, and it results in one of the following:

  • an understatement of a person’s liability to VAT
  • a false or inflated claim to repayment of VAT

The penalty amount will depend on the reasons for the inaccuracy and the amount of tax due (or repayable) as a result of correcting the inaccuracy.

How HMRC determine what reasonable care is

HMRC will take a taxpayer’s individual circumstances into account when considering whether they have taken reasonable care. Therefore, there is a difference between what is expected from a small sole trader and a multi-national company with an in-house tax team.

The law defines ‘careless’ as a failure to take reasonable care. The Courts are agreed that reasonable care can best be defined as the behaviour which is that of a prudent and reasonable person in the position of the person in question.

There is no issue of whether or not a business knew about the inaccuracy when the return was submitted. If it did, that would be deliberate and a different penalty regime would apply, see here  It is a question of HMRC examining what the business did, or failed to do, and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances.

Repeated inaccuracies

HMRC consider that repeated inaccuracies may form part of a pattern of behaviour which suggests a lack of care by a business in developing adequate systems for the recording of transactions or preparing VAT returns.

How to make sure you take reasonable care

HMRC expects a business to keep VAT records that allow you to submit accurate VAT returns and other documents to them. Details of record keeping here

They also expect a business to ask HMRC or a tax adviser if it isn’t sure about anything. If a business took reasonable care to get things right but its return was still inaccurate, HMRC should not charge you a penalty. However, If a business did take reasonable care, it will need to demonstrate to HMRC how it did this when they talk to you about penalties.

Reasonable care if you use tax avoidance arrangements*

If a business has used tax avoidance arrangements that HMRC later defeat, they will presume that the business has not taken reasonable care for any inaccuracy in its VAT return or other documents that relate to the use of those arrangements. If the business used a tax adviser with the appropriate expertise, HMRC would normally consider this as having taken reasonable care (unless it’s classed as disqualified advice)

Where a return is sent to HMRC containing an inaccuracy arising from the use of avoidance arrangements the behaviour will always be presumed to be careless unless:

  • The inaccuracy was deliberate on the person’s part, or
  • The person satisfies HMRC or a Tribunal that they took reasonable care to avoid the inaccuracy

* Meaning of avoidance arrangements

Arrangements include any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable). So, whilst an arrangement could contain any combination of these things, a single agreement could also amount to an arrangement.  Arrangements are `avoidance arrangements’ if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes of the arrangements.

NB: We at Marcus Ward Consultancy do not promote or advise on tax avoidance arrangements and we will not work with any business which seeks such advice.

Using a tax adviser

If a business uses a tax adviser, it remains that business’ responsibility to make sure it gives the adviser accurate and complete information. If it does not, and it sends HMRC a return that is inaccurate, it could be charged penalties and interest.

None of us are perfect

Finally, it is worth repeating a comment found in HMRC’s internal guidance “People do make mistakes. We do not expect perfection. We are simply seeking to establish whether the person has taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances…” 

The Default Surcharge for late VAT payments

By   5 September 2017
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A Default Surcharge is a civil penalty issued by HMRC to “encourage” businesses to submit their VAT returns and pay the tax due on time.

VAT registered businesses are required by law to submit their return and make the relevant payment of the VAT by the due date.

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.

Payments on Account (POA)

If a business is required to make POA it must pay them and the balance due with the VAT Return by electronic transfer direct to HMRC’s bank account. The due dates for POA are the last working day of the second and third month of every quarterly accounting period. The due date for the balancing payment is the date shown on the business’ VAT Return. It is important to ensure that payments are cleared to HMRC’s bank by these dates or there will be a default.

Consequence of default

A business will 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 on the due date within the next five quarters, 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%.  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.

If you can’t pay the VAT you owe by the due date or are having difficulties, contact the Business Payment Support Service immediately.

Special arrangements for small businesses

There are special arrangements if a business’ taxable turnover is £150,000 or less to help if there are short term difficulties paying VAT on time. HMRC send a letter offering help and support rather than a Surcharge Liability Notice the first time there is a default. This aims to assist with any short-term difficulties before a business formally enters the Default Surcharge system. If the business defaults again within the following 12 months a Surcharge Liability Notice will be issued.

Minimum surcharges

There is a minimum of £30 for surcharges calculated at the 10% or 15% rates. There will not be a surcharge at the 2% and 5% rates if it is calculated it to be less than £400. However, a Surcharge Liability Notice Extension extending the surcharge period will be issued and the rate of surcharge if you default again within the surcharge period will be increased.

Circumstances when HMRC will not levy a surcharge

There’s no liability to surcharge if a business:

  • submits a nil or repayment return late
  • pays the VAT due on time but submit your return late

HMRC will not issue a surcharge in these circumstances because there is no late payment involved. If a business had defaulted previously HMRC will issue a Surcharge Liability Notice Extension extending the surcharge period because the return is late, but they will not increase the rate of surcharge.

Time limit

A business’ liability to surcharge will expire if a business submits all of its returns and payments for tax periods ending on or before the end of the surcharge liability period on time.

Reasonable excuse

If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge.

There’s no statutory definition of reasonable excuse and it will depend on the particular circumstances of a case. A reasonable excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. The decision on whether a reasonable excuse exists depends upon the particular circumstances in which the failure occurred. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a reasonable excuse.

Disagreement over a surcharge

If you disagree with a decision that you are liable to surcharge or how the amount of surcharge has been calculated, it is possible to:

  • ask HMRC to review your case
  • have your case heard by the Tax Tribunal

If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension was sent. The letter should give the reasons why you disagree with the decision.

Examples when a review may be appropriate are if a business considers that:

  • it has a reasonable excuse for the default
  • HMRC applied the wrong rate of surcharge
  • HMRC used the wrong amount of VAT when calculating the surcharge
  • there are exceptional circumstances which mean the default should be removed

A business will still be able to appeal to the Tribunal if it disagrees with the outcome of the HMRC review.

We are very experienced in dealing with disputes over Default Surcharges, so if you feel that one has been applied unfairly, or wish to explore your rights, please let us know.

VAT Latest from the courts – Allocation of payments

By   13 March 2017
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VAT payment problems

In the Upper Tribunal (UT) case of Swanfield Limited (Swanfield)

The matter was whether HMRC had the right to allocate payments made by the applicant to specific periods against the wishes of the taxpayer.

Background

Swanfield was late with returns/payments such that it was subject to the Default Surcharge (DS) mechanism.  Details of the DS regime here

HMRC issued DSs to Swanfield, many at the maximum rate 15%. The total involved was said to be over £290,000. However, if the payments made by Swanfield had been allocated in a certain way (broadly; to recent debts as desired by the taxpayer) it would have substantially reduced the amount payable. However, HMRC allocated the payments to previous, older periods which were not the subject of a DS.

The Issue

The issue was relatively straightforward; did HMRC have the authority to allocate payments as they deemed fit, or could the taxpayer make payments for specific periods as required?

The Decision

The UT found that Swanfield were entitled to allocate payments made to amounts which would become due on supplies made in the (then) current period, even though the due date had not yet arrived.  Additionally, HMRC did not have the authority to unilaterally allocate payments made by the taxpayer to historical liabilities as they saw fit, in cases where the taxpayer has explicitly made those payments in relation to current periods.  In cases where there is no specific instruction in respect of allocation of the payment, HMRC was entitled to allocate payment without any obligation to minimise DS. The UT remitted this case back to the First Tier Tribunal to decide, as a matter of fact, whether Swanfield had actually made the necessary allocation.

Commentary

This is a helpful case which sets out clearly the responsibilities of both parties.  It underlines the necessity of a taxpayer to focus on payments and how to manage a debt position to mitigate any penalties.  Staying silent on payments plays into the hands of HMRC. It is crucial to take a proper view of a business’ VAT payment position, especially if there is difficulties lodging returns of making payment. Planning often reduces the overall amount payable, or provides for additional time to pay (TTP).  A helpful overview of payment problems here

Things can be done if a business is getting into difficulties with VAT; whether they are; reporting, submitting returns, making payments, or if there are disputes with HMRC. There are also structures that may be put in place to assist with VAT cashflow.

We would always counsel a business not to bury its head in the sand if there are difficulties with HMRC.  Please make contact with us and, in almost all cases, we can improve the situation, along with providing some relief from worries. VAT may be payable, but there are ways of managing payments – as this case demonstrates.

VAT – Intended penalty for participating in fraud

By   3 October 2016
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Consultation

A consultation was proposed in the 2016 Budget on the introduction of a new penalty for businesses that participate in VAT fraud. Now HMRC has announced that views are sought on; whether there is a case for a new penalty, its structure and to whom it should apply.  The intended changes will require amendment to Schedule 24 of the Finance Act 2007.  The main target of these proposed new measures is MTIC (Missing Trader Intra-Community) fraud.

Full details of the consultation paper here

Penalty principles

It may be worth reviewing HMRC’s view on the principles of applying a penalty, which they state are;

  • The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance. Penalties are not to be applied with the objective of raising revenues.
  • Penalties should be proportionate to the offence and may take into account past behaviour.
  • Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  • Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  • Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes.

Consultation Process

It may be an appropriate time to look at what the consultation process is and how it works.  This may helpfully be summarised (by HMRC) as:

There are 5 stages to tax policy development:

  • Stage 1 Setting out objectives and identifying options.
  • Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.
  • Stage 3 Drafting legislation to effect the proposed change.
  • Stage 4 Implementing and monitoring the change.
  • Stage 5 Reviewing and evaluating the change.

The closing date for comments on this consultation is 11 November 2016.

Comment

Putting to one side the minor irritation of taxpayers being called customers (a bête noire of mine I’m afraid) it is difficult to argue with the above principles and any attempt to prevent or deter VAT fraud is to be welcomed, as long as it does not impact on innocent parties and HMRC apply any such penalty in an even-handed manner. As a taxpayer in a personal and business capacity, I welcome any measures that may result in my tax bill being increased to cover revenue lost to fraud!

Action

Of course, please respond to HMRC should you feel that you should make your views known.  The consultation is open to businesses, individuals, legal firms, accountants, and other interested parties.

We occasionally come across situations where innocent parties have been inadvertently been caught up in fraudulent supply chains. Please contact us for advice on planning that may be put in place to avoid this position and how we can assist if HMRC are making enquiries. As always in VAT, it always pays to be proactive to ensure that processes and structures in place are robust and are demonstrably so.

VAT – How To Survive The Enforcement Powers

By   19 January 2016
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Penalties for VAT infringements are draconian and there is still an alarming array of enforcement powers to trap the unwary. By being conscious of the problem areas and planning carefully, it should be possible to avoid becoming an unwitting victim of the system. This article focuses mainly on VAT compliance.

Late Registration

You must notify HMRC if your turnover exceeds £82,000 in twelve months, or if you believe it will exceed £82,000 in the next thirty days.  The penalty for failing to notify liability falls within the single penalty system and it could be up to 100% of the VAT due.  There is no penalty if the taxpayer has a reasonable excuse for not registering at the correct time.

After Registration

Every VAT registered business needs to ensure that it is organised to deal with VAT correctly and on time:

  • Is there someone in your business who controls VAT accounting and ensures that new products etc. are properly dealt with for VAT purposes?
  • Do your business systems ensure that all output tax and input tax are properly recorded?
  • Are systems in force to ensure that proper evidence is obtained to support VAT input tax claims?
  • Where VAT is not charged on supplies made, is this correct in law and is proper evidence retained?
  • Are there systems in force to ensure that non‐deductible input tax is not reclaimed, e.g. most VAT on motor cars, or business entertaining?
  • Is VAT always considered before contracts are made?

Default surcharge

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.  .

Consequence of default

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 on the due date within the next five quarters, 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%.  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.

Errors on returns and claims

Incorrect returns incur a penalty under the following penalties apply:

  • An error, when reasonable care not taken: 30%;
  • An error which is deliberate, but not concealed: 70%;
  • An error, which is deliberate and concealed: 100%.

If a taxpayer takes ‘reasonable care,’ then no penalty is due.

More on errors here

Retention of records

The period for retaining records is six years. There is a fixed penalty of £500 for breaching this requirement.

Default interest

  • Interest on tax will arise in certain circumstances, including cases where:
  • An assessment is made to recover extra tax for a period for which a return has already been made (this includes errors voluntarily disclosed)
  • A person has failed to notify his or her liability to register (or made late notification), and an assessment covering a period longer than three months is made to recover the tax due
  • An invoice purporting to include VAT has been issued by a person not authorised to issue tax invoices.

The rate of interest is set by the Treasury and is broadly in line with commercial rates of interest.

Appeals

Appeals against penalties may be made to the independent tribunal. The tribunal has powers of mitigation in appropriate circumstances. Where the appeal is against the imposition of interest, penalties, or surcharge, the tax must be paid before an appeal can be heard. The tribunal is given the authority to increase assessments that are established as being for amounts less than they should have been.

Access to information

HMRC has extensive powers to obtain information. It can enter premises and gain access to computerised systems and remove documents. A walking possession agreement can arise where distress is levied against a person’s goods.

The sting in the tail

None of the above penalties or interest is allowable as a deduction when computing income for corporation or income tax purposes.

Action points

If you receive a VAT assessment (because you have not submitted a return), you must check it and notify HMRC within thirty days if it understates your liability

Make sure your systems and records are adequate to enable you to establish the gross amount of tax relating to a VAT period. The preparation of annual accounts cannot be regarded as a safeguard against penalties

Make sure you get your VAT return and payment in on time.

Some of these penalties may not apply if there is a reasonable excuse, but the scope is limited and should not be relied upon

If in doubt, contact us. It is important that you seek professional advice as early as possible.