If you make a mistake while recording, paying and submitting your VAT returns, HMRC may issue a VAT penalty. However, with the right steps, it is possible to reduce or avoid a penalty.
Will I get an HMRC VAT penalty?
The answer to this question depends entirely on the circumstances. There are various ways in which a VAT error might occur, be it a failure to register/de-register for VAT, keep VAT accounts, send VAT invoices, keep VAT receipts, or submit/pay VAT returns.
If any kind of error is made, HMRC will assess the severity of your actions. This will determine whether you receive a VAT penalty, and if so, how much the penalty will be. Factors that influence whether you receive a VAT penalty include whether or not:
- You have a reasonable excuse
- You made a genuine mistake
- You acted deliberately
Do you have a reasonable excuse for making a VAT error?
You may have a ‘reasonable excuse’ for making a VAT error. This means that even though you fell foul of the rules, you had a justifiable reason for doing so. For example, it might be that you:
- Suffered a bereavement shortly before the return/payment deadline
- Were unexpectedly taken ill
- Had a software malfunction shortly before the return/payment deadline
- Suffered a fire, flood or theft
- Have a disability
- Tried to submit your return/payment while HMRC was experiencing technical problems
If you receive a VAT penalty but you have a reasonable excuse, you can make an appeal. This may result in the decision being amended or annulled entirely.
Did you make a genuine mistake?
Even if none of these apply, you may still feel that your actions were not deliberate. Humans make mistakes and VAT laws are complex. It might be that you submitted a VAT return believing it to be correct – even though it later transpired to be inaccurate.
If you notify HMRC of your mistake, the general rule is that you will be charged 0% to 30% of the potential lost revenue as a penalty. If HMRC discovers the error (rather than you voluntarily disclosing the problem), you may be charged 15% to 30% of the lost revenue.
If you can establish that you genuinely made a mistake, and you co-operate with HMRC (for example, by giving them access to your records), you can reduce your VAT penalty even further. Your penalty may even be cancelled.
Did you act deliberately?
However, HMRC takes a dim view of those whose actions are deliberate. If you deliberately try to reduce your VAT liabilities, you could be charged between 20% and 100% of the potential lost revenue. The charge will depend on whether:
- Your actions were deliberate
- Your actions were deliberate and concealed
- You disclosed your actions to HMRC or not
Nevertheless, just because HMRC accuses you of deliberate tax avoidance, does not mean that you are automatically guilty. The burden of proof rests with HMRC. It must prove that you knowingly brought about a loss of tax.
VAT tax solicitors
If you are concerned about receiving a VAT penalty – or you have already received a letter from HMRC regarding a VAT penalty – please contact us for expert legal advice. We can explain the options open to you, recommending the best way forward.
You may wish to lodge an appeal on the basis that you made a reasonable mistake. Or, if HMRC accuses you of deliberately trying to limit your tax liabilities, we can argue your innocence. It might be that your mistakes were careless rather than calculated.
Alternatively, it may be preferable to co-operate with HMRC to secure a reduce penalty. An early admission can also prevent HMRC pursuing civil or criminal charges.