Reducing your exposure to VAT penalties?

Is HMRC’s light touch approach to VAT penalties changing? Businesses are advised to make sure their VAT affairs are in order – just in case.

The current penalty rules for under-declared VAT, in place since 2008, are primarily based on the behaviour leading to the error. If HMRC finds a VAT error and considers there to have been a lack of reasonable care by the taxpayer, a potential penalty of 30% of the VAT concerned could be imposed, plus interest. However, HMRC can reduce this to 15% and, if the taxpayer finds and declares the error voluntarily, the penalty can even be reduced to zero. HMRC can also suspend penalties subject to taxpayers complying with certain conditions.

“When the current rules were introduced, there was concern that HMRC might seek to raise maximum revenue by always imposing the maximum penalty,” says Robert Facer, a VAT expert at Moore Stephens. “But in practice, HMRC has taken a fairly light touch approach. Recently, however, we have seen a hardening of HMRC’s stance and more of a push to apply a higher penalty in certain circumstances.”

Although it is unclear whether this is down to individual tax inspectors or reflects a wider HMRC policy, businesses should be on their guard. “The risk of penalties for under-declared VAT should always be taken seriously,” Robert says. “If HMRC seeks to apply the maximum rate, the penalty cost could be substantial.”

Businesses can minimise their penalty risk by ensuring their VAT affairs are in order – before any HMRC VAT inspector comes knocking. A Moore Stephens VAT healthcheck could be the solution. “This can range from a high-level review of VAT accounting procedures, through to a detailed drilldown into individual transactions,” Robert notes. “It can be highly tailored to client needs, perhaps just focusing on part of the business.” A VAT healthcheck also helps demonstrate that your business is taking ‘reasonable care’, which is the first defence against any penalties.

If any adjustments are required to previously declared VAT, voluntary disclosure can minimise the risk of a VAT penalty being imposed. “If the taxpayer voluntarily discloses the error, HMRC could reduce the penalty to zero,” Robert stresses. “But if HMRC finds it, the minimum penalty is 15%. So there is potentially quite a benefit to disclosing the error yourself.”

“We may also find adjustments in favour of the business,” Robert adds. “It may be that the business is not claiming all the VAT it could, or a partially-exempt business may be applying a lower recovery rate than it is entitled to apply. So a healthcheck provides an opportunity for making VAT savings as well as minimising the risk of penalties.”


UK VAT team

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