If I submit an incomplete or incorrect VAT Return what penalties will apply?

The penalty system for errors made on VAT returns filed after 31 March 2009 was introduced on a stepped behaviourist approach aimed at encouraging compliance. As such the sliding scale is based on whether the error is careless (as a failure to take reasonable care), deliberate but not concealed or deliberate and concealed (by for example, falsifying documents to conceal it). The penalty is levied on the ‘potential lost revenue’. A reduction in the amount of the penalty levied is available depending on the type of disclosure to HMRC, whether it is classed as ‘prompted or ‘unprompted’. For a careless unprompted disclosure the penalty can be reduced to zero, so the scale is between 0-30%’ whereas, the starting point for a prompted disclosure is 15%; so that the scale is between 15-30%. A prompted disclosure would be for example if HMRC were to discover the inaccuracy on a routine VAT inspection.

HMRC are able to suspend a penalty in respect of careless inaccuracies for up to two years. Provided that conditions can be set to remedy any future repetition being made; the taxpayer is obliged to comply with the terms set during the period of suspension so that they meet any conditions set by HMRC, for instance by rectifying a systems error. At the end of the two year term the amount of the suspended penalty is cancelled.

If the taxpayer disagrees with the amount or the imposition of a penalty they, or their adviser can appeal. They can request that HMRC reconsider the imposition or the amount of a penalty, or request a suspension within 30 days of the penalty being issued. If, the taxpayer considers the outcome of HMRC’s reconsideration to be unacceptable, an appeal can be made to Tribunal within 30 days of the notification of HMRC’s reconsideration.

Apart from suspension, HMRC have the scope to levy a reduced penalty for timing errors, where an error is corrected in the following return; at a reduced rate of 5% per annum, adjusted according to time, for example 1.25% for three months, rather than imposing the amount in the table above shown for a prompted careless error.

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