HMRC have become increasingly aggressive in their approach to applying penalties to VAT mistakes. So it makes sense to focus on this question of how to avoid VAT penalties or at least keeping them to an absolute minimum. A key point to resolve is whether the error was careless or deliberate and we have certainly had arguments with HMRC about what should be regarded as careless and not deliberate. One officer told me that not checking out the rules properly was a deliberate act to not get it right and therefore a much rate of penalty needed to apply as error could not be regarded as due to carelessness. Nonsense of course but this is the kind of thing we should now expect to be up against and take all possible steps to protect ourselves.
Given the risks of penalties now being applied in almost any situation I was interested in comments in the partly successful decision in the First Tier VAT Tribunal for Faux Properties (TC07051). The company sold a property on which £33,800 VAT was charged and invoiced but somehow omitted from the VAT return (how?…). Luckily for the company the tribunal decided this was as a result of carelessness and not a deliberate act so the rate of penalty was reduced.
The Penalty Risk
There are different penalty systems according to the problem. For example a new penalty regime was introduced in 2023 for any late payments or late submission of returns. For errors on VAT returns submitted the first step is to try to show that ‘reasonable care’ was taken when completing the VAT return. If that is not possible then HMRC can impose the following penalties for inaccurate returns.
| Default | Min penalty – unprompted disclosure | Min penalty – prompted disclosure | Maximum penalty |
| Careless (but not deliberate and not concealed) | 0% | 15% | 30% |
| Deliberate but not concealed | 20% | 35% | 70% |
| Deliberate and concealed | 30% | 50% | 100% |
Similar penalty ranges apply to wrong-doings including failure to register and issuing VAT invoices when not registered for VAT. Again the penalty rate depends on whether the wrong-doing is concealed, whether it was deliberate and whether disclosure was prompted by HMRC.
The Decision
In arriving at its decision in the Faux Properties case the tribunal commented that the burden of proof rested on HMRC to demonstrate that the company had deliberately failed to declare the VAT on the property sale.
Quoting from an earlier case the judge decided ‘there is an element of intent in ‘deliberate’ which is not present in ‘careless’. It represents a higher degree of default’.
The judge also acknowledged that VAT under-declarations could arise from cases of genuine human error. So this is something HMRC should pay heed to when applying penalties – it isn’t just a case of a situation being either careless or deliberate, it might just have been a mistake.
Given that penalties are a real bottom line cost then it makes sense to work hard at mitigating and avoiding VAT penalties as far as you possibly can. We’ve had some great success in this area and would be happy to help.