If an error is less than £10,000 (or less than £50,000 and 1% of turnover in that VAT period) then it can be adjusted on the VAT return. If it is over these limits it has to be separately notified to HMRC and will be subject to penalties.
Harsh penalties based on ‘behaviour’
The current penalty regime came in in 2009 and has imposed a higher level of penalties based on HMRC’s perception of how a business has behaved. The penalties range from:
- Up to 30% for a careless error;
- Up to 70% where it is found to be deliberate; and
- Up to 100% where it is both deliberate and concealed.
There seems to a presumption among visiting officers that a penalty is normally due (with mitigation as appropriate) rather than only being applied to cases where a real lack of care has been exercised. HMRC’s attitude seems to be if it’s an error it must be due to carelessness rather than an alternative interpretation of the legislation or published guidance, which is often far from clear.
Discovering and notifying an error
If a business or its advisers discover an error they will need to act promptly in order to minimise any penalties. Waiting until HMRC discovers the error or hoping they won’t is not an option.
Tip:
HMRC should be told of errors at an early stage – even if the quantum is unknown – since penalties are reduced for unprompted disclosure, for example 15% for the unprompted disclosure of a careless error. If HMRC contact a business to arrange a visit before the business informs them of the existence of an error then it is not treated as an unprompted disclosure.
Full and prompt disclosure
An unprompted disclosure of the error will reduce the level of the penalty, so that – in theory at least – a full unprompted disclosure of non-careless error could see a nil penalty.
HMRC only view a disclosure as unprompted if it is made “before the business has a reason to believe that HMRC have discovered or are about to discover the inaccuracy, under-assessment, failure to notify, deliberate withholding of information or ‘wrongdoing’”. Otherwise it is viewed as having been prompted. This would include HMRC contacting a business to arrange a visit even though the inspection had not started. HMRC say that a disclosure made at the start of a compliance check by a business because they think that it will be discovered later, cannot be unprompted!
The correction of an error under the £10,000 limit on a VAT return will not be seen as being notified to HMRC as an unprompted disclosure unless followed up by a letter to them detailing the error and the return it has been adjusted on. Therefore in this situation discovery of the correction through a VAT visit would result in a full (not reduced) penalty!
Getting the penalty suspended
If HMRC do try and impose a penalty a business should have a plan to prevent similar errors in future. If a business can show that it has taken action to prevent the error happening again, the penalty can be suspended and therefore effectively avoided, providing the business makes no more errors during the period of suspension.
Practical Tip:
If you discover an error on your VAT returns you need to make a full and prompt disclosure to reduce the level of penalties. Even if you adjust the error on your VAT return you still need to make a written notification of the error to HMRC to avoid a penalty.
