Tag Archives: vat-penalties

Oops! – Top Ten VAT howlers

By Marcus Ward 2 November 2021

I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”. While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:

Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT triggerpoint can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
Forgetting the impact of the Capital Goods Scheme (CGS). The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.

So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.

Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!

Businesses still owe £Billions after VAT deferral

By Marcus Ward 27 July 2021

Over 25% of VAT registered businesses that were permitted to delay VAT payments as a result of the pandemic still owe HMRC the tax deferred.

The now closed payment scheme permitted VAT registered persons to defer VAT payments due between March and June 2020 and around 600,000 businesses took advantage of the relief. The deadline was 30 June 2021, and it has been stated that over a quarter of business have failed to contact HMRC about their debts and have not made the necessary payments.

The total outstanding, according to The Treasury, is £2.7 billion which represents circa 9% of the VAT take. Of the tax deferred under the scheme, £17.8 billion has been paid and around £13 billion is being paid via monthly instalments.

HMRC have announced its approach to collection VAT debt after Covid19.

It has also become clear is that businesses and consumers have fallen into default during and after the pandemic. It is anticipated that the ability to settle of debts on time will decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief. An article on VAT Bad Debt Relief here.

We would urge, that even if a business cannot make a payment, that it still submits VAT returns on time. It is tempting to accept a centrally issued assessment if it is for a lesser amount than the actual VAT due for the period. However, such action can, and often does, lead to penalties and increased interest from HMRC.

VAT registration delays – latest

By Marcus Ward 8 March 2021

Anecdotally, we understand that some businesses applying for registration are experiencing significant delays. Further, attempts to contact HMRC by email is often difficult, and telephones are regularly not answered (although we understand that some people have enjoyed more success with the webchat). Also, the Non-Established Taxable Persons (NETP) office has moved, right at the time when more EU businesses need to register in the GB due to Brexit. This has created an even longer backlog.

Confirmation

The Business Delivery Team at HMRC has confirmed that it is attempting to deal with a very high number of applications, which are being delayed for various reasons (not least by the sheer volume one expects). The department has also stated that the following actions and checks will assist with faster processing times and urges applicants to check that all information requested set out here is included with the application to avoid any further delays. The most salient being to use the online method rather than the hard copy. However, this is not always possible if additional documentation needs to be sent.

How to avoid common errors identified by HMRC

ensure that the addresses provided on the VAT 1 form matches the business’s principal place of business (PPOB)
check that the notification of a trade classification matches the supplies the business makes
the VAT treatment of activities must be correctly identified
the correct person must sign the application – eg; for a corporate body it must be a director, company secretary or authorised signatory or an authorised agent
ensure the correct registration date (effective date of registration – EDR) is given. And that the EDR is accurate considering the circumstances that have been outlined for requesting registration elsewhere in the application
the bank account details provided must be in the name of the taxable person

And I will add; do not forget form VAT5L when registering a business which is involved in land and property transactions.

The Business Delivery Team also stated that “We are also considering how we can improve the registration process by resolving more cases in real time by telephone and engaging with customers in a different way to gather any further required information. We’ll tell you more about this shortly.”

While any improvement in communication is to be welcomed, it remains to be seen what practical measures will be implemented to speed up registration processing and how soon these will be put in place.

Ten Questions every business should ask about VAT

By Marcus Ward 14 October 2020

1. Am I sure that a VAT inspection would not find any errors?

An inspection can result in significant assessments, penalties and interest, apart from a business becoming “known” to HMRC. Peace of mind is a valuable benefit for a business owner too!

2. Am I sure that I am reclaiming as much VAT as possible?

We often find that businesses miss out on recovering input tax, this clearly results in an actual cost.

3. Do I take full advantage all available VAT reliefs, customs exemptions and duty refund schemes?

Failure to do so will create a tax cost and may be putting a business in a less competitive position.

4. Am I up to date on the indirect tax developments in my key markets?

Indirect tax changes rapidly, and so does the market place. Being unaware of changes that affect you may result in VAT being overpaid, or penalties being levied if you have underdeclared tax. It may also put you at a competitive disadvantage.

5. Have I considered the impact of tax rate changes on my pricing and margin, and have I taken the necessary measures?

Budgeting is affected by VAT. Failure to consider indirect taxes may eat into profit.

6. Do I collect all the data about my customers and transactions that could be required by tax authorities?

As in many VAT circumstances, getting it wrong or missing something results in penalties.

7. Do I comply with all indirect tax requirements in the jurisdictions where I operate or where my customers belong?

VAT and GST does exist outside the UK and ignoring overseas indirect tax obligations may result in action being taken by foreign authorities which will prove to be very uncomfortable and expensive. It is important to understand the rules for indirect tax in each country/area you trade. Don’t get caught out.

8. Do I have the tools to analyse my indirect tax flows and data?

Allocating sufficient technical and human resources to VAT is important. Seeking professional advice at the appropriate time is also prudent.

9. Could changes in the way my business is structured or how transactions are organised improve my indirect tax position and/or reduce complexity?

Saving money and reducing tax complications must be near the top of every business’ wish list. Seeking professional advice on structuring a business or a transaction goes a long way to achieving this

10. Is my business using the right VAT scheme?

There are many special schemes that a business may use, from the Flat Rate Scheme to Margin Schemes. Most are optional, but some, like the Tour Operators’ Margin Scheme are compulsory. Choose the wrong one, or being unaware of a beneficial scheme could cost.

It is important to constantly monitor a business’ VAT position. The nature of trade changes, technology changes, case law changes and the VAT rules are constantly in a state of flux. It is easy to assume that everything is alright because it has always been done that way, but there may be significant exposures and missed opportunities out there. Things will also change once the terms of Brexit have been agreed (or not). We offer services from a basic healthcheck to a full technical review. A review will let you rest easy in your bed if nothing else!

VAT Flat Rate Scheme (FRS)– New judgement on retrospective application

By Marcus Ward 14 January 2016

Latest from the courts

In the recent case of KDT Management Ltd an appeal against a decision by HMRC not to allow the appellant to retrospectively apply the percentage of turnover it says was appropriate to its business under the FRS instead of the one it says it mistakenly chose was considered.

HMRC issued an assessment to recover VAT which was alleged to have been omitted from the appellant’s returns because it did not apply certain increases of rate to its turnover under the FRS of accounting for VAT.

It was also an appeal against a decision by HMRC not to allow the appellant to retrospectively apply the percentage of turnover it says was appropriate to its business under the FRS instead of the one it says it mistakenly chose.

The decision was that the appeal against the assessments to VAT and interest were upheld. The appeal against the decision not to backdate was also upheld and the decision was cancelled.

Please contact us if you have been in dispute over the rate applicable on a FRS, or if you think you may be using an inappropriate percentage. This is likely to mainly affect small businesses.

Details of the FRS here

VAT – The Default Surcharge. What is it, is it fair and will the regime change?

By Marcus Ward 1 December 2015

What is the Default Surcharge?

Default Surcharge is a civil penalty to encourage businesses to submit their VAT returns and pay the tax due on time.

When will a Default Surcharge be issued?

A business is in default if it sends in its VAT return and or the VAT due late. No surcharge is issued the first time a business is late but a warning (a Surcharge Liability Notice) is issued. Subsequent defaults within the following twelve months (the “surcharge period”) may result in a surcharge assessment. Each time that a default occurs the surcharge period will be extended. There is no liability to a surcharge if a nil or repayment return is submitted late, or the VAT due is paid on time but the return is submitted late (although a default is still recorded).

How much is the surcharge?

The surcharge is calculated as a percentage of the VAT that is unpaid at the due date. If no return is submitted the amount of VAT due will be assessed and the surcharge based on that amount. The rate is set at 2 per cent for the first default following the Surcharge Liability Notice, and rises to 5 per cent, 10 per cent and 15 per cent for subsequent defaults within the surcharge period. A surcharge assessment is not issued at the 2 per cent and 5 per cent rates if it is calculated at less than £200 but a default is still recorded and the surcharge period extended. At the 10 per cent and 15 per cent the surcharge will be the greater of the calculated amount or £30.

Specific issues

The default surcharge can be particularly swingeing for a fast growing company. Let’s say that a small company grows quickly. In the early days the administration was rather haphazard, as is often the case, and a number of returns and payments were submitted late. Fast forward and the turnover, and the VAT payable, has grown significantly. Being late at this time means that the amount of default surcharge is considerably higher than when the original default which created the surcharge took place. This leads us onto whether the surcharge is proportionate.

A business with cashflow difficulties may well ask whether it should be penalised by HMRC for having those difficulties; which of course will add to the problem.

Proportionality

The existing, long-standing default surcharge regime has always had issues with the principle of proportionality. The regime has regularly been challenged in the Courts.

Is it proportionate that a same penalty is applied for a payment which is one day late and one which is one year late? This is a matter which has concerned both HMRC and the Courts for a number of years.

In the Upper Tribunal case of Total Technology (Engineering) Ltd the Judge concluded that it was possible for an individual surcharge to be disproportionate, but that the system as a whole was not fundamentally flawed. It is also worth noting that in In Equoland judgment the judge stated that a penalty which is automatic and does not take into account the circumstances is at the least tending towards being disproportionate. The default surcharge is automatic and it is one of the few penalties that cannot be mitigated in any circumstances.

Defence against a surcharge

In order to have a surcharge withdrawn it is necessary to demonstrate that a business had a reasonable excuse for the default.

This is a subject of an article on its own. Certain factors, like relaying on a third party are not accepted as a reasonable excuse. HMRC state that a business will not be in default if they, or the independent tribunal, agree that there is a reasonable excuse for failing to submit a VAT Return and/or payment on time.

There is no legal definition of reasonable excuse but HMRC will look closely at the circumstances that led to the default.

If the circumstance that led to the default were unforeseen and inescapable and a business is able to show that its conduct was that of a conscientious person who accepted the need to comply with VAT requirements, then it may amount to a reasonable excuse.

What sort of circumstances might count as reasonable excuse?

HMRC provide guidelines on circumstances where there might be a reasonable excuse for failing to submit a VAT Return and/or payment on time. These include:

computer breakdown
illness
loss of key personnel
unexpected cash crisis – where funds are unavailable to pay your tax due following the sudden reduction or withdrawal of overdraft facilities, sudden non-payment by a normally reliable customer, insolvency of a large customer, fraud or burglary. A simple lack of money is unlikely to be accepted as a reasonable excuse.
loss of records

Latest

A recent discussion document sought views from businesses and individuals on potential improvements to how HMRC applies penalties (including the default surcharge) for failing to pay what is owed or to meet deadlines for returns or registration.

HMRC is considering whether and how it should differentiate between those who deliberately and persistently fail to meet administrative deadlines or to pay what they should on time, and those who make occasional and genuine errors for which other responses might be more appropriate.

In the document HMRC highlight two issues with the current VAT default surcharge regime. The first is the concern that while the absence of penalty for the initial offence in a 12 month period gives business the chance to get processes right, some customers simply ignore this warning.

The second concern is the issue of proportionality which fails to distinguish between payments that are one or two days late or many months late.

In my view, it is likely that in the near future we will hear proposals for the system being amended. I think we may anticipate the introduction of mitigation and suspension.

The penalty regime……the dark side of VAT

By Marcus Ward 12 November 2015

VAT Penalties

I have made a lot of references to penalties in other articles over the years. So I thought it would be a good idea to have a closer look; what are they, when are they levied, rights of appeal, and importantly how much could they cost if a business gets it wrong?

Overview

Broadly, a penalty is levied if the incorrect amount of VAT is made, either by understating output tax due, or overclaiming input tax, or accepting an assessment which is known to be too low.

Amount of penalty

HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then no penalty will 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%.

Reasonable care

There is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.

HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore a penalty may still be applicable.

What the penalty is based on

The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.

Defending a penalty

The percentage penalty may be reduced by a range of ‘defences:’

– Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;

– Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;

– Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.

Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to review their own VAT returns.

A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.

HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance, and encourage businesses which genuinely seek to fulfil their obligations.

Appealing a penalty

HMRC have an internal reconsideration procedure, where a business should apply to in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the First Tier Tribunal. A business can appeal on the grounds of; whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.

The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.

These are just the penalties for making “errors” on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.

Assistance

My advice is always to check on all aspects of a penalty and seek assistance for grounds to challenge a decision to levy a penalty. We have a very high success rate in defending businesses against inappropriate penalties. It is always worth running a penalty past us.

VAT Land and Property – Why Opt To Tax?

By Marcus Ward 5 October 2015

Opting to tax provides a unique situation in the VAT world. It is the sole example of where a supplier can choose to add VAT to a supply….. or not.

VAT free supplies

The sale or letting of a property is, in most cases, exempt by default. However it is possible to apply the option to tax (OTT) to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate. (It is not possible to OTT a residential property).

Why opt?

Why would a supplier then deliberately choose to add VAT on a supply?

The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken. Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.

Once made the OTT is usually irrevocable for a 20 year period (although there are circumstances where it may be revisited within six months of it being taken). There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases H M Revenue & Customs’ (HMRC) permission must usually be obtained before the option can be made.

Two part process

The OTT is a two part process.

The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.

The second part is to formally notify HMRC (after obtaining permission if necessary). The form on which this is done is a VAT1614A. Here

There can be problems in cases where the OTT is taken, but not formally notified.

Disadvantages

The benefit of taking the OTT is the ability to reclaim input tax which would otherwise fall to be irrecoverable. However, one disadvantage is that opting the sale or rent of a property may reduce its marketability as it is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property.

Another is that the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be funded up front.

Also, an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.
Transfer Of a Going Concern (TOGC)

I always say that advice should be taken in all property transactions and also in cases of a Transfer of A business as a Going Concern (TOGC). This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met.

Property transactions are high value and often complex. The cost of getting VAT wrong, or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues. For these reasons, please seek VAT advice at an early stage of negotiations.

More on our land and property services here

VAT Penalties: A Discussion Document by HMRC

By Marcus Ward 11 February 2015

A discussion document is seeking views by 11 May about potential improvements to how HMRC applies penalties for failing to pay what is owed or to meet deadlines for returns or registration.

As HMRC designs a tax system for the modern, digital world, it wants to ensure that its approach to penalties also keeps up to date with both technology and behavioural science. HMRC is considering whether and how it should differentiate between those who deliberately and persistently fail to meet administrative deadlines or to pay what they should on time, and those who make occasional and genuine errors for which other responses might be more appropriate.

HMRC is looking for feedback from individuals and businesses. The purpose of the discussion is to seek views on the policy design and any suitable possible alternatives, before consulting later on a specific proposal for reform.

I look at the main points below and identify where changes to the penalty system are most likely to be made.

The document may be accessed here:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/400211/150130_HMRC_Penalties_a_Discussion_Document_FINAL_FOR_PUBLICATION__2_.pdf

Summary

In terms of Indirect Tax there are two main areas which HMRC is focussing on:

VAT default surcharge – HMRC highlights two issues with the current VAT default surcharge regime. The first is the concern that while the absence of penalty for the initial offence in a 12 month period gives business the chance to get processes right, some customers simply ignore this warning.

The second concern is the issue of proportionality which fails to distinguish between payments that are one or two days late or many months late.

Excise regulatory penalties – This also considers proportionality, noting that regulatory failures can lead to very large penalties, because the penalty is fixed as a percentage of the duty. The size of such penalties might be viewed as disproportionate.

The existing, long-standing default surcharge regime has always had issues with the principle of proportionality. The regime has been challenged in the Courts – notably in the Trinity Mirror Plc case (soon to be heard at the UT) where the earlier FTT allowed the appeal against a default surcharge on the grounds of proportionality.

If you would like assistance in making a representation please contact me.