Forum

FYI - Useful VAT article from a business pundit - they're determined to get us - honest mistakes or not.....

VAT errors - to disclose or not to disclose?

Since April 2008, H M Revenue & Customs have been working to a single set of penalties across all of the taxes they administer. This article focuses on how these penalties are applied to VAT errors and the evolution of a very different VAT penalty and disclosure regime from the one we were used to.

In the pre 2008 days, if you made an error on a VAT return, you had two ways of correcting this - by amending your next return or by making a voluntary disclosure. Which you chose depended on the size of the error but as long as you did one or the other and chose the correct one, you would not incur a penalty on the error.

Under the new regime, errors are now categorised as one of the following:

 - An error made after taking reasonable care

 - An error made without taking reasonable care

 - A deliberate but unconcealed error

 - A deliberate and concealed error

If you have made an error, the first question you are required to ask yourself is which of the four definitions above best describe this error. This, of course, is a subjective decision and you are most likely to veer towards the first category. Whilst we are mostly prepared to admit our errors, very few of us will readily admit that there was an element of culpability in making the error.

However, in the mind of the VAT man, will the error seem as 'pure' and will he be convinced that it happened despite us taking reasonable care. What is reasonable? I'm afraid I can't answer those questions but I can say that experience has shown that the VAT man's expectation of us is high and that, with reasonable care, he believes we should be able to account for the right amount of VAT at the right time, every time.

Of course, all of this subjectivity would be irrelevant if it wasn't for the new behaviour based penalty rates which penalise the four types of error and mitigate them for disclosure as follows:

 - An error made after taking reasonable care no penalty

 - An error made without taking reasonable care up to 30% penalty mitigated to a minimum 0%

 - A deliberate but unconcealed error up to 70% penalty mitigated to a minimum 20%

 - A deliberate and concealed error up to 100% penalty mitigated to a minimum 30%

So, having discovered and categorised your error, the decision whether to disclose it needs now to be based on the potential penalty and the maximum mitigation you might expect to receive. There are still minimum disclosure limits as under the previous Voluntary Disclosure regime and on the face of it, these seem quite generous at £10,000 or up to £50,000 for larger businesses with turnover over £1m. However, whilst these limits still allow you to adjust for your error without making a disclosure, they no longer protect you from penalty or allow you any mitigation which only come with disclosure.

There is a little glimmer of hope in all of this in the shape of suspended penalties which can reduce a penalty to nil, subject to agreement of a change in behaviour to prevent a reoccurrence. This implies an acceptance of carelessness to begin with but, with the right negotiation, can save you a substantial penalty liability. My overriding advice therefore is, apart from in exceptional circumstances, disclose the error you have discovered and negotiate with the help of your advisor for maximum mitigation or suspension.

Debra Dougal, Partner in Haslers

Tel: 020 8418 3333

Email: debra.dougal@haslers.com