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Steve Allen of VAT Advisers Ltd outlines the New VAT Penalty Regime.

Introduction

From 1 April 2010, there is a new penalty regime in place for failing to register for VAT on time. Under Finance Act 2008 Schedule 41, the new penalty will be behaviour-based in line with the cross-tax penalties that were introduced from 1 April 2009 for ‘inaccuracies’ on VAT and other tax returns.

The penalty bands will have maximum and minimum limits, with potential mitigation available depending on the degree of assistance provided to HMRC in establishing the net tax liability.

The Outgoing VAT Penalty Regime

Under the outgoing penalty scheme the penalty amounts were quite rigid in that there were fixed penalty amounts as follows:

• Reasonable excuse – 0% penalty
• Registering up to 9 months late - 5% penalty
• Registering up to 18 months late – 10% penalty
• Registering more than 18 months late – 15% penalty

For unprompted disclosures, HMRC gave a minimum 25% discount off the penalty rate (e.g., a 10% penalty reduced to 7.5%, and a 15% penalty reduced to 11.25%).

The New VAT Failure to Notify Penalty Regime

Under the new incoming regime, the penalty bands will be the same four categories introduced for the inaccuracy penalties last year; namely:

• ‘reasonable excuse’
• ‘not deliberate’
• ‘deliberate’
• ‘deliberate and concealed’

‘Reasonable Excuse’

There is no penalty due where a reasonable excuse exists. This is the same basic position as with the outgoing regime.

HMRC give the following as examples of a reasonable excuse:

• the death of a partner or close relative
• you, your partner, or a close relative had a serious illness

‘Not Deliberate’

Where notification is unprompted and made within 12 months of the registration date, there is a minimum penalty of 0%, and a maximum penalty of 30%, depending on the level of mitigation.

If the notification is unprompted but more than 12 months late, the minimum penalty is 10% and the maximum penalty is 30%, depending on mitigation.

Prompted disclosures made within 12 months carry a minimum penalty of 10%, and maximum penalty of 30%, again depending on mitigation. 

Prompted disclosures after 12 months have a minimum 20% penalty and maximum 30% penalty.

‘Deliberate’

There is no 12-month dividing line for deliberate penalties. Quite simply, where the notification is unprompted, there is a minimum penalty of 20%, and a maximum penalty of 70%. Where prompted, there is a minimum penalty of 35%, and a maximum penalty of 70%, depending on the level of mitigation.

‘Deliberate and Concealed’

Not surprisingly, there is no 12-month dividing line for deliberate and concealed penalties either. Where unprompted, there is a minimum penalty of 30%, and a maximum penalty of 100%. Where prompted, the minimum penalty is 50%, and the maximum penalty 100%, once again depending on the level of mitigation.

Mitigating the Penalty

As mentioned earlier, the penalty amount can be reduced depending on the level of assistance given to HMRC in establishing the arrears.

The following are quoted by HMRC as ways in which a mitigation reduction can be earned:

• telling HMRC everything about the failure and tax liability – up to 30%
• assisting HMRC in working out the net tax due – up to 40%
• giving HMRC access to your figures – up to 30%

Summary

On the plus side, the new regime is better than the outgoing one because there is scope for a 0% penalty for an unprompted disclosure within 12 months. On the downside, there is no longer a maximum penalty of 15% - depending on the type of behaviour involved, and whether the notification was prompted or not, we now have scope for a penalty of 100% of the net tax liability.

The other downside is that each case will arrive at its own penalty level, again depending on the behaviour and mitigation involved.

As is the case with all new cross-tax penalties being introduced by HMRC, there is a strong emphasis and incentive on making unprompted disclosures.  This is consistent with the Department’s risk-based approach to collecting tax, which is intended to bring in the maximum amount of tax using the minimum amount of resources (i.e., staff).