VAT penalties are not set at a level which provides compensation to HM Revenue and Customs (HMRC), but are intended to penalise the taxpayer’s error, as is illustrated by the decision of the First-Tier Tribunal in a case in which a careless mistake, with no loss of VAT to HMRC, was deemed worthy of a penalty of more than £2,000.
The issue arose because of a timing difference as to when VAT was recoverable. The result was that £33,750 in input VAT was claimed a quarter too early. The error was discovered by HMRC, rather than by the business. When this occurs, HMRC take a less lenient approach to penalties.
Although there was in reality only a potential loss of revenue of three months’ interest on the sum and there was no dispute over the sum due, HMRC assessed a penalty of 15 per cent.
The Tribunal found HMRC’s approach to be too harsh, but still awarded a penalty of 7.5 per cent – more than £2,000 – a value clearly many times greater than any potential loss to the Treasury.
More recently, HMRC have issued a notice to the effect that new guidance will be issued stating that in cases in which an underdeclaration will automatically be reversed in the following quarter, a reduced penalty will be charged.
The important point to note here is that VAT penalties are many times greater than the loss incurred by HMRC. It is therefore crucial to make sure that returns are accurate. Errors are especially likely during the holiday season when staff may be away for long periods.