Although some of the penalties for VAT infringements have been less severe in recent years, there are still plenty of enforcement powers remaining.
You must notify HM Revenue & Customs (HMRC) if your turnover exceeds £85,000 in twelve months, or if you believe it will exceed £85,000 in the next thirty days.
The penalty for failing to notify liability falls within the single penalty system.
A default occurs if HMRC has not received your return and all the VAT due by the due date.
The relevant date is the date that cleared funds reach HMRC’s bank account.
Consequence of default:
You receive a warning after the first default - the Surcharge Liability Notice (SLN). Do not ignore this notice. If you fail to pay the VAT due on the due date within the next five quarters, the surcharge will be 2% of the outstanding tax.
The surcharge increases to 5% for the next default, and then by 5% increments to a maximum of 15%.
Lower rate (2% and 5%) surcharge assessments will not be issued for less than £400. At rates of 10% and 15% the surcharge liability becomes subject to a minimum charge of £30.
Each default, whether it is late submission of the return or late payment, extends the surcharge liability period, but only late payment incurs a surcharge.
Special arrangements for small businesses
Businesses with qualifying turnover up to £150,000 will be sent a letter offering help and support following the first default rather than a SLN.
This arrangement is intended to allow extra time to sort out any short-term difficulties before formally entering the default surcharge system.
Any further default within twelve months will result in the issue of a SLN.
Errors on returns and claims
Incorrect returns incur a penalty under the new penalty regime.
Interest on tax will arise in some circumstances, including where:
An assessment is made to recover extra tax for a period for which a return has already been made (this includes errors voluntarily disclosed)
A person has failed to notify his or her liability to register (or made late notification), and an assessment covering a period longer than three months is made to recover the tax due
An invoice purporting to include VAT has been issued by a person not authorised to issue tax invoices
Normally, interest accrues from the due date for submission of the return for the period concerned. However, the maximum period is three years, although interest will continue to run on assessments remaining unpaid after thirty days from the date of issue.
The rate of interest is broadly in line with commercial rates of interest.
Appeals against penalties may be made to the independent tribunal.
The tribunal has powers of mitigation in appropriate circumstances.
Where the appeal is against the imposition of interest, penalties, or surcharge, the tax must be paid before an appeal can be heard.
The tribunal is given the authority to increase assessments that are established as being for amounts less than they should have been.
A formal procedure is now established for appeals to be settled by agreement. This agreement must be in writing, and there is a thirty-day cooling off period during which the taxpayer may cancel the agreement.
Access to information
HMRC has extensive powers to obtain information. It can enter premises and gain access to computerised systems and remove documents.
A walking possession agreement can arise where distress is levied against a person’s goods.
Other important points
If you receive a VAT assessment (because you have not submitted a return), you must check it and notify HMRC within thirty days if it understates your liability.
Some of these penalties may not apply if there is a reasonable excuse, but the scope is limited and should not be relied upon