THE DANGERS OF NOT UNDERSTANDING VAT RULES

Russell Francis Interiors paid the price for a careless VAT error. The mistake could have cost them £10,124 and the case illustrates the pitfalls of not understanding fully the time of supply rules.

A tribunal decided that the business ought to have sought professional advice and should therefore not go unpunished. Harsh though it may seem, the tribunal’s decision is in line with the new law on penalties which took effect in 2009.

The business purchased a property and reclaimed VAT one quarter earlier than it should have done. Although the error was self-correcting and HMRC did not lose tax overall, a penalty of 15% was nevertheless imposed. The standard penalty for a careless error, which has not been disclosed to HMRC, is 30% of the VAT underpaid or overclaimed.  The penalty can be reduced to 15% if the business co-operates with HMRC in quantifying the error, or lower in special circumstances. The tribunal decided that 15% was too high and halved the penalty. The final amount of the penalty was £2,531.

The time of supply rules are among many topics discussed on The Essentials of UK VAT. A sound knowledge of the rules would have prevented this costly mistake and the penalty would have been avoided. This is a case in which the benefits of training are quantifiable.  The penalty of £2,531 is more than fourteen times the cost of attending the seminar – and the cost of training seminars is usually deductible for income and corporation tax purposes, while penalties are not.

To make sure you understand the rules of VAT you should attend the seminar – for details please go to our website.

Stephen Smith
Managing Director
UK Training (Worldwide) Limited

What are the penalties?

If a taxpayer cannot demonstrate that reasonable care was taken and the VAT liability has been understated then a rising penalty rate will be applied to the amount of VAT lost by HMRC.

If HMRC deem that the taxpayer was careless then the rate will be 30%. However if they believe that the understatement of the VAT liability was deliberate then the rate will be 70% and if they believe the taxpayer has also attempted to conceal it then the rate will be 100%.

If a taxpayer voluntarily discloses that an understatement of the VAT liability has been made before HMRC discovers or is about to discover it, then the penalty rates could be reduced. The rate for careless mistakes could be reduced to 0%, deliberate understatements of VAT liabilities to 20% while those that are deliberate and concealed could be reduced to 30%.

If a taxpayer discloses the amount following a VAT inspection or enquiries made by HMRC then the extent of the reduction will be less. The rate for careless mistakes could be reduced to 15%, deliberate understatements of the VAT liabilities to 35% while those that are deliberate and concealed could be reduced to 50%.