Contractors, a ‘not me guv’ defence to overturn VAT penalties for deliberate error won’t cut it with HMRC
The decision of the Upper Tribunal (UT) in C F Booth Ltd v HMRC identifies some interesting points for limited company directors regarding the issuing of penalties for inaccurate VAT returns – where those returns contain deliberate inaccuracies, writes chartered accountant Graham Jenner, founder of Jenner & Co.
Two key areas of VAT in Booth Ltd Vs HMRC
The case involved HMRC penalties charged following assessments by the tax authority for two aspects of VAT:
- An assessment for ‘output’ tax. (The appellant company had zero-rated eight sales of metal on the basis that the materials had been exported -- but HMRC contended that there was insufficient evidence of export.)
- Disallowance of ‘input’ tax on the purchase (HMRC’s assessment was on the basis that the transactions were connected with the fraudulent evasion of tax, and the company knew or should have known of that connection).
Don’t let the mention of potentially shiny metals distract you from quite serious issues here that could crop up with your own directing of a limited company! That said, for most VAT-registered contractors, all sales will be at standard rate, making the reporting of output tax (i.e. VAT on sales) relatively straightforward.
So provided all sales of the VAT period are accounted for on the return, the risk of error, and therefore, a subsequent HMRC penalty, is low.
Zero-rated and standard-rated? Let the risk begin...
However, some contractors will be in an industry where all sales are zero-rated, and again, the risk of error and penalty is low. Yet for those contractors where some sales are zero rated, and some are standard rated, there surely is more risk of getting it wrong.
Let’s revert to point 1 above – relating to penalties resulting from an error for overclaimed input tax. While the magnitude of any error for a contractor is likely to be quite small, penalties of up to 100% of the VAT overclaimed, can soon mount up and are worth trying to avoid. Contractors should therefore make sure that input tax is claimed only where it relates to the business, and where there is a valid VAT receipt.
Fortunately, HMRC accepts that errors can easily be made, and net errors of less than £10,000, or errors between £10,000 and £50,000 but less than 1% of your total sales (as shown on the return correcting the error), can be rectified by adjusting the next VAT return after the error is discovered -- provided they are not deliberate errors. All other errors must be reported separately on form VAT 652.
HMRC's VAT penalties and powers
Let’s now turn to HMRC’s power to charge penalties, which in the Booth case was front and centre.
Remember, errors can be ‘non-careless’, ‘careless’ or ‘deliberate’. While no penalty applies to non-careless errors, if such an error is discovered and not corrected, HMRC will then treat it as a ‘careless’ error.
Penalty levels: (as a percentage of the error)
Careless: 30% but can be reduced to 0%
Deliberate not concealed: 70% but can be reduced to 20%
Deliberate and concealed: 100% but can be reduced to 30%
‘Telling’ i.e. disclosing to HMRC: up to 30% of the penalty
Helping: up to 40% of the penalty
Giving access (to records): up to 30% of the penalty
The actual percentage reduction of HMRC penalty will depend on the timing, nature and extent of the above elements.
Be aware though, there exists an anomaly in that a ‘careless’ error can be adjusted on the next VAT return, but that does not amount to disclosure for the purposes of reducing the possible penalty. That would suggest that, if HMRC later discovered the error (and its adjustment), they could only reduce the penalty down by 70% (of 30%). In practice, we have never known a situation where HMRC has attempted to raise a penalty for a ‘careless’ error that has subsequently been corrected.
In the Booth case, the UT confirmed that there was no requirement for dishonesty to be proved when seeking to impose an HMRC penalty for a ‘deliberate’ inaccuracy.
HMRC’s guidance states that: “A deliberate but not concealed inaccuracy occurs when a person gives HMRC a document that they know contains an inaccuracy. It is not necessary to demonstrate that the person knew what the accurate figure was, only that they knew that the figure they put on the document was not accurate.”
The penalty regime outlined above relates to various taxes, not just VAT. In relation to Value Added Tax, “giving a document” to HMRC would be the submission of the VAT return.
A 'not me guv' response won't wash with HMRC
But significantly for contractors, the Booth case highlights that HMRC does not need to demonstrate that the individual completing the VAT return knew of the inaccuracy, but rather that the corporate entity ‘knew’. This means that as an individual within your business, you personally having knowledge or an awareness of an inaccuracy is neither here nor there – it’s the company which is responsible, so any ‘not me guv’ response you give when an inspector calls isn’t going to wash!
It is further worth bearing in mind that, where an accountant or bookkeeper completes the VAT return on behalf of a company, it is still the company that will be liable for any HMRC penalties if there are VAT return errors.
Swingeing sanctions, so ready your 'reasonable care' evidence
The Booth case (and the tables above) is proof that HMRC’s powers to levy penalties are quite extensive. In fact, the taxpayer went before the UT to try to quash one VAT penalty of a massive £1,369,082, and a second VAT penalty of £75,731. The taxpayer failed to overturn both these extremely large financial santctions.
Reassuringly for other taxpayers, there is a process that attempts to reduce the level of penalties in certain circumstances. And the process is all about taking ‘reasonable care.’ Let’s give he who imposes that requirement -- the taxman, almost the last word: “HMRC expects you to keep records that allow you to send accurate tax returns and other documents to them.” All that said, if you aren’t sure about anything, you should ask either HMRC or a tax adviser. Remember, and as the Revenue itself further advises, if you took ‘reasonable care’ to get things right but your return or other documents were still inaccurate, HMRC won’t charge you a penalty.