Bulk of VAT penalties reversed on review

More than half of all penalties issued to taxpayers by HM Revenue & Customs for late or inaccurate VAT returns are being overturned on appeal.

Official figures show that over the last 18 months, HMRC completed 28, 812 internal reviews of VAT penalties on firms, of which 16,270 were found to have been imposed incorrectly.

Accompanying data, from the same period, covering all taxes where penalties were issued for technical reasons show a similar pattern, with 48% subsequently ruled by HMRC to have been wrongly issued.

Accountants at UHY Hacker Young, which obtained the dataset using freedom of information rules, said the figures from HMRC’s database were “deeply disturbing”.

That’s partly because they confirm anecdotal evidence seen by the firm that HMRC officials have been accusing taxpayers of “carelessness” over their tax returns “whenever they could”.

Taking “reasonable care” with a late or even inaccurate tax return should not normally result in a penalty, though it was said to be in HMRC’s interests to collect additional revenue where possible.

Simon Newark, VAT partner added: “HMRC officers are handing out fines like traffic wardens hand out parking tickets.

“It would be understandable if a small percentage of fines were wrong, but these figures are staggering.”

Yet the figures, from HMRC’s new internal review process, also reinforce concern that “many taxpayers will not bother to query the penalty,” in spite of a high proportion being issued in error.

“It’s no exaggeration to say that incorrect decisions could and do destroy businesses,” Mr Newark reflected. “Most businesses do their best to understand a very complex tax [but] when even HMRC’s own officers struggle to understand it why should businesses suffer?”

He called the Revenue to provide more training for its officers, to ensure their first decision is the right decision, and said disciplinary measures should be introduced for those who mistakenly issue penalties.

He also said the department’s review team was not truly independent and “support the original decision whenever they can,” overturning the penalty only where it is “blatantly wrong.”

However a spokesman for HMRC's business unit said: "Removing a penalty after someone gives a reasonable excuse for their lateness does not mean the penalty was wrongly levied, but that we accept the customer's excuse for the failure.”

The spokesman stressed that only a "small proportion" of the millions of decisions HMRC makes each year were queried, and that they stemmed from "information we have at the time."

Moreover, the released figures are seen by HMRC as evidence that its review process is actually working well, since it was introduced in April to resolve disputes without the need for a tribunal.

Still, the accountancy firm questioned the department’s claim that the reviews are settling tax issues inexpensively, not least because they typically take 45 days to reach a conclusion.

“It can be very costly and time consuming for taxpayers even if a fine is overturned on review, let alone taking a case to the Tax Tribunal,” it said. “It’s not as if HMRC reimburse the cost of contesting a decision which is wrong.”

The firm’s VAT team said it was concerned that, under pressure to maximise revenue to help the public finances, HMRC officers are “prepared to take a chance on a fine.”

But overall at the tax authority, with the dataset showing that up to 60% of penalties are cancelled on a review forced by an appeal, the stance for taxpayers to adopt in response is clear.

“The lesson here is if you get a fine or a decision you are not happy with, be prepared to challenge it,” Mr Newark said. “The chances are it might be worth your while.”

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