Monthly Archives: February 2015

VAT – Overseas Holiday Lets: A Warning

By   February 27, 2015

Do you own property overseas which you let to third parties when you are not using it yourself?

holiday accom

 

It is important to understand the VAT consequences of owning property overseas.

The position of UK Holiday Lets

It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £81,000 pa. and this is only likely if a number of properties are owned.

It should be noted that, unlike other types of rental of homes, holiday lettings are always taxable for VAT purposes.

Overseas Holiday Lets

Other EC Member States have nil thresholds for foreign entrepreneurs.  This means that if any rental income is received, VAT registration is likely to be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT in the country that the property is located.  Failure to comply with the domestic legislation of the relevant Member State may mean; payment of back VAT and interest and fines being levied. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs.  This may be restricted if the home is used for periodical own use.

Given that every EC Member State has differing rules and/or procedures to the UK, it is crucial to check all the consequences of letting property overseas. Additionally, if any other services are supplied, eg; transport, this gives rise to a whole new (and significantly more complex) set of VAT rules.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the local authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

VAT – Top 10 Tax Point Planning Tips

By   February 24, 2015

VAT Tax Point Planningtime-clock

If a business cannot avoid paying VAT to the HMRC, the next best thing is to defer payment as long as legitimately possible. There are a number of ways this may be done, dependent upon a business’ circumstances, but the following general points are worth considering for any VAT registered entity.

A tax point (time of supply) is the time a supply is “crystallised” and the VAT becomes due to HMRC and dictates the VAT return period in which VAT must be accounted for.  Very broadly, this is the earliest of; invoice date, receipt of payment, goods transferred or services completed (although there are quite a few fiddly bits to these basic rules).

 The aims of tax point planning

1.            Deferring a supplier’s tax point where possible.  It is sometimes possible to avoid one of these events or defer a tax point by the careful timing of the issue of a tax invoice.

2.            Timing of a tax point to benefit both parties to a transaction wherever possible. Because businesses have different VAT “staggers” (their VAT quarter dates may not be the co-terminus) judicious timing may mean that the recipient business is able to recover input tax before the supplier needs to account for output tax.  This is often important in large or one-off transactions, eg; a property sale.

3.            Applying the cash accounting scheme. Output tax is usually due on invoice date, but under the cash accounting scheme VAT is only due when a payment is received.  Not only does this mean that a cash accounting business may delay paying over VAT, but there is also built in VAT bad debt relief.  A business may use cash accounting if its estimated VAT taxable turnover during the next tax year is not more than £1.35 million.

4.            Using specific documentation to avoid creating tax points for certain supplies. If a business supplies ongoing services (called continuous services – where there is no identifiable completion of those services) if the issue of a tax invoice is avoided, VAT will only be due when payment is received (or the service finally ends).

5.            Correctly identifying the nature of a supply to benefit from certain tax point rules. There are special tax point rules for specific types of supplies of goods and services.  Correctly recognising these rules may benefit a business, or present an opportunity for VAT planning.

6.            Generate output tax as early as possible in a VAT period, and incur input tax as late as possible. This will give a business use of VAT money for up to four months before it needs to be paid over, and of course, the earlier a claim for repayment of input tax can be made – the better for cashflow.

7.            Planning for VAT rate changes. Rate changes are usually announced in advance of the change taking place.  There are specific rules concerning what cannot be done, but there are options to consider when VAT rates go up or down.

8.            Ensure that a business does not incur penalties for errors by applying the tax point rules correctly. Right tax, right time; the best VAT motto!  Avoiding penalties for declaring VAT late is obviously a saving.

9.            Certain deposits create tax points, while other types of deposit do not.  It is important to recognise the different types of deposits and whether a tax point has been triggered by receipt of one. Also VAT planning may be available to avoid a tax point being created, or deferring one.

10.         And finally, consider discussing VAT timing planning for your specific circumstances with your adviser.

It should always be remembered that it is usually not possible to apply retrospective VAT planning as VAT is time sensitive, and never more so than tax point planning.

I have advised a lot of clients on how to structure their systems to create the best VAT tax point position.  Any business may benefit, but  I’ve found that those with the most to gain are; professional firms, building contractors, tour operators, hotels, hirers of goods and IT/internet businesses.

(c) Marcus Ward Consultancy Ltd 2015

VAT on residential developments

By   February 20, 2015

Should work on existing residential property have the same VAT treatment as new build housing? 

The UK cannot create a new zero rate, however, should, say, the reduced rate apply to extensions/redevelopment?building-plans-architecture-design-floor-plan-nki

And if so, where should the line be drawn?

Article from Property Week here

 

VAT – Prompt Payment Discounts (PPD) changes to valuation from 1 April 2015

By   February 19, 2015

discount b&wVAT – Prompt Payment Discount Changes

Businesses don’t have much time to change their accounting procedures and systems to deal with the new PPD rules.  A recent survey has shown that over 13% of business will be affected by the changes which do not appear to have been given much publicity. These changes are necessary to align UK legislation with the EC Principal VAT Directive.  It is crucial that advisers and businesses are not caught out by the change in valuation of supplies offered at a discount.

The changes – summary

Old Rules

Under the previous rules output tax was due on the discounted price offered for prompt payment – regardless of whether the customer takes up the discount.

New Rules

From 1 April 2015 output tax is due on the full consideration actually paid by the customer when PPD is offered.

The new rules are required because HMRC is concerned that there was a difference between output tax paid on the discounted price, and the (higher) amount received if a PPD is not taken.  Historically, this was not so much of an issue because most PPD was offered B2B and the VAT was generally recoverable by the recipient of the supply.  However, increasingly, PPD is now offered B2C and therefore reduces “sticking tax” and the consequential VAT loss for HMRC.

A simple example

Old Rules

B2B PPD of 10% if invoice paid within 21 days.

Goods                                          £10,000

VAT 20% on £9,000                     £1,800

Invoice Total                               £11,800

Both parties post £1,800 to VAT account and there is no adjustment if discount not taken.

 

New Rules

Using the above figures:

Must assume discount is not taken so invoice total = £12,000

If customer actually takes up PPD a credit note is issued for both elements of the supply – £200 credit for the VAT.

Both parties process the new documentation to adjust the original invoice – VAT is neutral.

This increases a business’ administrative burden and also creates a significant additional risk of penalties and interest if businesses are ignorant of the change, or implement the changes incorrectly.

VAT Input Tax recoverable in each Member State – A country by country guide

By   February 16, 2015

VAT Refunds – Irrecoverable Tax A Country by Country Detailed GuideMap EC

VAT incurred in other EC Member States may be recovered in certain circumstances. However, some claims are specifically blocked by Member States. Unfortunately, there are differences between each Member State’s domestic legislation.

For full details of how to make a claim for VAT incurred abroad, please see “Reclaiming VAT Overseas” here

Here is a summary of VAT which cannot be claimed via the refund system:

Austria

VAT cannot be recovered on:

• The purchase, hire, operation and repair of passenger motor vehicles, except driving school vehicles, taxis and hire car vehicles;

• Entertainment expenses, except for business meals where the purpose of the meeting and the identity of the participants are documented.

Belgium

VAT cannot be recovered on:

• Manufactured tobacco;

• Spirits, except those intended for resale or supply in respect of a service (e.g. bars, hotels and restaurants);

• Accommodation, meals and beverages under an accommodation or a catering contract, unless these costs are incurred by a company’s staff effecting outside supplies of goods or services or by taxable persons who in turn supply the same services for consideration;

• Entertainment expenses (although expenses incurred in respect of an advertising event may be recoverable);

• Generally; the purchase of motor vehicles used for passenger transport and goods and services relating to such vehicles (although in some cases a 50% restriction applies and there are exceptions depending on use).

Bulgaria

VAT cannot be recovered on:

• Goods or services intended for making VAT-exempt supplies;

• Goods or services intended for “non-business” supplies;

• Entertainment expenses;

• Motorcycles or passenger cars (with less than five seats, excluding the driver’s seat), although certain exceptions apply;

• Goods or services related to the maintenance of a motorcycle or passenger car; and

• Goods that have been confiscated by the State or a building that has been demolished because it was unlawfully constructed.

Cyprus

VAT cannot be recovered on:

• Non-business supplies; if a supply has both business and non-business purposes, VAT can be reclaimed only on the business portion of the supply;

• Supplies or imports of passenger cars;

• Certain second-hand goods, e.g. cars and antiques for which the VAT margin scheme is used;

• Business entertainment and hospitality expenses, except the provision of

entertainment to employees;

• Supplies used or to be used to make a supply in Cyprus; and

• Goods and services, such as hotel accommodation, purchased for resale and that are for the direct benefit of travellers.

Czech Republic

VAT cannot be recovered on:

• Entertainment expenses.

Denmark

VAT cannot be recovered on:

• Meals for the owner and staff of a business. However, VAT on meals incurred for business purposes is partly refundable;

• The acquisition and running of places of residence for the owner and staff of a business;

• The acquisition and operating costs connected to holiday homes for the owner and staff of a business;

• Entertainment expenses, representation costs and gifts. However, VAT on business entertainment is partly refundable;

• The driving of foreign tourist buses;

• The acquisition, repair and operation of motor vehicles designed for the conveyance of not more than nine persons; and

• Payments in kind to the staff of a business. No more than 25% of VAT may be recovered on restaurant bills and no more than 50% of VAT on hotel accommodation.

• There is a right to deduct a specific amount of VAT for companies that lease

passenger cars if:

• The leasing period is at least six months; and

• The vehicle is used for business purposes for at least 10% of the mileage.

Estonia

A VAT refund is available if an Estonian company can make a similar VAT deduction on its business expenses. This limits the VAT deduction, for example, on meals and entertainment expenses. VAT on accommodation costs is deductible if the trip is not for leisure purposes.

Finland

VAT cannot be recovered on:

• Immovable property that the taxable person or its staff uses as a residence, nursery, recreational or leisure facility, as well as goods and services connected with it or its use;

• Goods and services related to transport between the place of residence and place of work of the taxable person or its staff;

• Goods and services used for business entertainment purposes and business gifts;

• (With some exceptions) Passenger cars, motorcycles, caravans, vessels intended for recreational or sports purposes and aircraft with a maximum permissible take-off weight not exceeding 1,550 kg, or on goods and services related to their use;

• Purchases intended for the private consumption of the entrepreneur or his personnel;

• Purchases related to exempt sales of investment gold;

• Purchases of taxable goods and services for direct benefit of passengers made in the name of a foreign travel service company; and

• Purchases that are VAT-exempt, but have erroneously been charged with VAT.

France

VAT cannot be recovered on:

• Accommodation costs incurred on behalf of the management or staff of a company. (VAT is recoverable when such expenses are incurred for the benefit of persons not employed by the company, provided the expenses are incurred in the interest of the company or when it supplies the same services for consideration);

• The supply, import, leasing, repair and maintenance of most cars for passenger transport and other related costs, such as petrol. (However, 80% of VAT on diesel fuel can be recovered and VAT is recoverable when the cars are purchased by a car dealer for resale or by a person who hires out cars.);

• Goods transferred without remuneration or for remuneration that is much lower than their normal price, unless the value of the goods is very low (except business gifts whose collective value does not exceed EUR 65, including VAT, per beneficiary per year); and

• Domestic transport of passengers and related expenses (except for public transport supplies and transportation from home to work, subject to conditions).

If French VAT has been incorrectly charged, a foreign taxable person can, in principle, obtain a refund (unless a corrected invoice has been issued—a specific procedure applies for a supplier to issue a corrected invoice).

Germany

VAT cannot be recovered on:

• Supplies of goods and services that are not used for business purposes, including gifts; or

• Supplies of services acquired or goods imported connected to certain exempt activities.

Greece

VAT cannot be recovered on:

• Intra-community supplies and exports.

• The supply, import or intra-community acquisition of tobacco products that are destined for use in non-taxable transactions;

• The supply, import or intra-community acquisition of alcoholic beverages that are destined for use in non-taxable transactions;

• Entertainment expenditure, including expenditure on hospitality and amusement;

• The acquisition, leasing or hire, modification, repair or maintenance of passenger vehicles with up to nine seats, pleasure boats except if they are used for the sale, leasing or transportation of persons for a fee;

• Accommodation, food, transport and entertainment expenses incurred for company personnel or representatives;

• The supply of goods and services in connection with real estate located in Greece (in certain circumstances);

• Expenses unrelated to the business activity of the claimant; and

• Incorrect VAT invoicing.

• If the VAT imposed is used for both taxable and exempt transactions, a refund will be granted only in respect of the taxable transactions.

Hungary

VAT cannot be recovered on:

• Use of goods or the services directly for exempt supply of goods and/or services; or

• Use of goods or services for purposes other than taxable business activities, except when the goods or services are entirely used in the interest of achieving taxable objectives.

• Motor fuels and other fuels, goods that are necessary directly for the operation of passenger cars;

• Passenger cars, motorcycles above 125 cc, yachts, sporting and leisure boats;

• Residential buildings (except where a taxable person engaged in the leasing of such buildings opted for taxation of the rental);

• Purchases of goods and services related to the construction and renovation of residential buildings;

• Food and beverages;

• Services received in connection with the operation and maintenance of passenger cars;

• Services of restaurants and other public catering services;

• Entertainment services;

• Taxi services;

• Parking services and highway tolls, with the exception of parking services used and highway tolls paid for a motor vehicle whose gross weight is equal to 3.5 tons or more (including buses); and

• 30% of telephone and mobile phone costs and services related to data submission by internet protocol.

Iceland

VAT cannot be recovered on:

• Cars used for personal transport, including car hires and fuel;

• Food and drinks, including restaurant expenses;

• Gifts and entertainment expenses;

• Residential housing of employees.

Ireland

VAT cannot be recovered on:

• Petrol except diesel;

• Food, drink, hotels/accommodation or other personal services (as from 1 July 2007, VAT on accommodation is recoverable if certain stringent conditions are satisfied);

• Entertainment expenses; and

• The purchase, hire or importation of passenger motor vehicles (VAT on motor vehicles used for certain purposes is recoverable).

Italy

VAT cannot be recovered on:

• Entertainment expenses.

• It is possible to deduct VAT paid on cars/fuel/maintenance used for the company’s business. The percentage deduction set by Italian VAT legislation is 40% in the case of both private and business use. The deduction is 100% if exclusively used for business purposes.

Latvia

VAT cannot be recovered on:

• The acquisition of unused immovable property and services received in relation to the construction, reconstruction, renovation, restoration or repair of immovable property;

• Goods and services purchased for personal use;

− Rental, maintenance and repair of a passenger car if these services are not used for business purposes. If the vehicle is used for business purposes, VAT can be recovered for the business use (in proportion to that use), but the claimant must provide supporting documentation with the application (e.g. route description in Latvian or English);

− Purchase of fuel, lubricants and spare parts intended for a passenger car if they are not used for business purposes;

− Expenses for recreation activities;

− Catering (including restaurants);

− Health improvement activities; and

− Entertainment.

Lithuania

VAT cannot be recovered on:

• The purchase or lease of a passenger car;

• Transport of passengers by cars (taxi services);

• Entertainment and representation expenses. However, where a taxable person is established in the EU, 75% of the VAT incurred on entertainment and representation expenses (goods and

services) is refundable;

• The supply of goods or services on which VAT does not have to be accounted for;

• Goods supplied to another EU member state if the supply of these goods would have been subject to the zero rate; and

• Goods exported from the EU if the supply of these goods would have been subject to the zero rate.

Luxembourg

VAT cannot be recovered on:

• Supplies on which VAT has been charged by mistake;

• Goods or services that are VAT exempt.

• Goods or services used for private purposes.

Malta

VAT cannot be recovered on:

• Tobacco or tobacco products, except those intended for resale;

• Alcoholic beverages, except those intended for resale or for the supply of catering;

• Works of art, collectors’ items and antiques, except those intended for resale;

• Non-commercial motor vehicles (and goods and services for the purpose of

repairing, maintaining and fuelling non-commercial motor vehicles), except those intended for resale, charter/hire, driving instructions or for the purpose of the carriage of goods or passengers for consideration;

• Vessels or aircraft, except those intended for resale or charter/hire for the purpose of the carriage of goods or passengers for consideration;

• Purchases relating to the provision of hospitality or entertainment, subject to certain exceptions; and

• Purchases relating to the provision of transport or entertainment to employees, subject to certain exceptions.

The Netherlands

VAT cannot be recovered on:

• Supplies of goods and services that are not used for business purposes;

• Supplies acquired or imported in connection with an exempt business activity;

• Food and drinks in restaurants, hotels and cafes;

• Business entertainment in excess of EUR 227 per year per person;

• Employee benefits in-kind in excess of EUR 227 per year per person;

• VAT on costs for the lease or rental of cars (these are limited to an 84% VAT refund – a 16% adjustment is made for private use).

Norway

VAT cannot be recovered on:

• Entertainment expenses;

• Food and drinks;

• The purchase, hire or importation of passenger cars, as well as on petrol, oil, repairs, maintenance and other related costs;

• Goods and services acquired for use outside the scope of Norwegian VAT;

• Goods imported and used for activities outside the scope of Norwegian VAT; and

• Benefits-in-kind for employees.

Poland

VAT cannot be recovered on:

• Goods and services, the acquisition of which resulted from a donation or free provision of services;

• Lodging and catering services, with some exceptions;

• The deductibility of input VAT on the purchase (lease) of passenger cars is limited to 60%, but not exceeding PLN 6,000 per car.

• The purchase of engine fuel, diesel oil and gas for passenger cars or other motor vehicles.

Portugal

VAT cannot be recovered on:

• Accommodation, food and drinks (except in the case of specific events);

• Entertainment expenses;

• Purchase, hire, importation and repairs of vehicles, boats, and aircraft (unless these assets are used in specific activities). However, it is possible to recover VAT incurred on commercial cars and trucks;

• Fuel expenses (50% of the VAT on diesel is recoverable and 100% if certain

vehicles are involved);

• Tobacco; and

• Travel expenses, including tolls (except in the case of specific events).

Romania

VAT cannot be recovered on:

• Invoices on which VAT was unlawfully charged;

• Acquisitions that can be VAT exempt;

• Acquisitions made by tour operators that apply the margin scheme in the Member State in which they are established;

• Tobacco products and spirits, except those intended for resale or for supply during the performance of a catering service and;

• Acquisitions of passenger vehicles and fuel (with some exceptions).

Slovak Republic

VAT cannot be recovered on:

• Supplies of goods and services where the application of VAT was not in compliance with the Slovak VAT legislation;

• Supplies of goods that are or may be exempt from VAT (intra-Community supply of

goods, export of goods); or

• Supplies made under the tour operator margin scheme.

Slovenia

VAT cannot be recovered for:

• Yachts and boats for sport and amusement, fuel, lubricants, spare parts and related services;

• Aircraft and fuel, lubricants, spare parts and connected services;

• Cars and motor bikes and fuel, spare parts and related services;

• Accommodation, meals and beverages, unless these costs are incurred by a taxable person in the course of supplies made as part of their economic activity and;

• Entertainment expenses.

Spain

VAT cannot be recovered on:

• Entertainment expenses;

• Food and drinks, tobacco;

• Jewels and precious stones;

• VAT on accommodation, restaurant and travel expenses will be refundable only to the extent the expenses are deductible for personal and corporate income tax purposes.

• VAT incurred on car rentals and fuel will be refundable only if the car is exclusively used for business activities.

• If not exclusively used for business activities, refunds of VAT on car purchases, car importations and car leases will be possible, but only if the car can be considered an investment good for Spanish VAT purposes (ie; it must be used for at least one year within the company), and only for the proportion that the vehicle is used for business purposes (a business use of at least

50% will be required).

Sweden

VAT cannot be recovered on:

• Permanent accommodation;

• Travel services (only applicable to persons supplying travel services);

• Unreasonable entertainment services;

• Purchase of motor vehicles; and

• Car rentals (these are 50% refundable), with certain exceptions for vehicles intended to be sold or leased by a taxable person whose particular economic activity involves the sale or leasing of motor vehicles, vehicles intended to be solely used for passenger transport for hire or reward and vehicles intended to be used for driving license education and transport of the deceased.

United Kingdom

VAT cannot be recovered on:

• Non-business supplies (if a supply covers both business and non-business use VAT can be reclaimed on the business element of the supply);

• Supplies the claimant intends to use for carrying on an economic activity in the

U.K. or that the claimant intends to export from the U.K. (i.e. economic activities, the place of supply of which is the U.K.);

• Business entertainment and hospitality expenses and other expenses on which the recovery of VAT is restricted in the U.K.;

• Goods and services purchased for resale (e.g. as part of package holiday) and which are for the direct benefit of travellers;

• VAT that has been incorrectly invoiced or where VAT has been charged on the dispatch of goods to another Member State, or the export of goods outside the EU;

• The purchase or import of passenger motor vehicles, unless used wholly for business purposes and

• Certain second-hand goods, such as antiques, for which a tax invoice will not be issued.

• Not more than 50% of VAT can be recovered on the lease of passenger motor vehicles not used solely for business purposes.

Claims

For details of how to make a claim for VAT incurred abroad, please see “Reclaiming VAT Overseas” here

 

VAT Penalties: A Discussion Document by HMRC

By   February 11, 2015

Cambridge terraceA 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.

The penalty regime….the dark side of VAT!

By   February 9, 2015

I have made a lot of references to penalties in my other articles. So what are they, and how much could they cost if a business gets it wrong?  167634606

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 usually HMRC will not apply a penalty.

Penalty Categories 

–  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%.

Unhelpfully, 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.

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 have their VAT returns reviewed.

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. A business should apply to this in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the Tribunal. A business can appeal 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.

Help

In my view there is generally a very good chance of success in a business challenging a penalty.  Each case should at least be reviewed by an adviser, and experience insists that a robust defence often results in full or part mitigation.  We have a very good track record in appealing HMRC decisions and have taken cases right up to High Court.  However, most cases can be settled before they get to Tribunal, and indeed, the greatest chance of success is usually at the beginning of the process before HMRC become entrenched.