Bolton News business doctor column – VAT update – changes to rules on VAT errors

Andy Ball, tax partner at Cowgill Holloway LLP

Question:
My business has erred in its VAT returns and I’m worried that we may be penalised for this. The mistake was not deliberate – will this make a difference to any punishment? How will the changes to the VAT error system affect my business and how can I ensure compliance?

Answer:
“As of 1 July 2008, Her Majesty’s Revenue and Customs (HMRC) has increased the upper limit for self-correcting errors on VAT returns from £2,000 to £10,000. This means that, where a business makes a net VAT error of under £10,000, it can make an adjustment on its next VAT return without having to notify HMRC.

“From 1 April 2009, a new system of penalties will apply to errors on VAT returns. Under the current rules, a penalty of 15 per cent of the VAT that would have been lost may be payable, depending on the amount of VAT that was understated on the return.

“The new rules will be based on both the amount of VAT understated and the behaviour that gives rise to the understatement. No penalty will be applied for ‘mistakes’ but ‘deliberate action with concealment’ may incur higher penalties.

“There is also a new concept of ‘suspended’ penalties. HMRC will be able to impose a penalty that will not be enforced for a period of time, and if the taxpayer makes no further errors, the penalty will lapse. This will be used to encourage businesses to become VAT-compliant.

“Penalties of up to 30 per cent of the VAT that would have been lost will apply where there has been a failure to take ‘reasonable care’, and this will depend on the individual circumstances of the case. A larger business will be expected to exercise a greater degree of care than a smaller one. HMRC will also take into account whether professional advice was obtained.   “Each penalty can be substantially reduced where the taxpayer makes a disclosure, particularly where it is unprompted. We would therefore advise businesses to submit a voluntary disclosure for VAT errors caused by not taking reasonable care, even where the amount of the error is less than £10,000.   “We would also recommend that businesses obtain advice where they are unsure about the VAT treatment of transactions, and ensure that they take every care when completing their VAT returns so that if an error is discovered, no penalty is imposed.”