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Mar

VAT - penalty for careless error - update PUBLISHED IN VAT

Shortly after writing my “shopping list” blog, requesting a reconsideration of the penalty for careless errors, I learnt of a tax tribunal decision which made my point perfectly.

 

The unfortunate taxpayers, who carried out a fully taxable business, and could reclaim all their VAT, had purchased a building the price of which was subject to VAT. They knew that they could reclaim all of the VAT charged on the purchase. It was a high value item.
 
They paid a deposit, and the VAT invoice, for the deposit amount, duly arrived. But instead of claiming only the VAT on the deposit value, they claimed VAT on the full value of the transaction, because they thought the deposit set the "tax point".
 
They received the invoice for the balance in the following VAT quarter. But by that time, the VAT officer had already called to check the substantial claim in the previous return. He disallowed the balance of the value for which they had no invoice, and issued a 15% penalty for a careless claim.
 
The taxpayer was aggrieved that he should have to pay a penalty for an error which could not have resulted in any permanent loss of tax, since it was a timing error of, as it turned out, just one quarter. HMRC was not prepared to waive or suspend the penalty.
 
The tribunal believed that the reduction was insufficient, and halved the penalty again. Nonetheless it took the view that there has been carelessness on the part of the tax payer, and despite the fact that there could be no permanent loss to HMRC, since all the evidence showed that it would not have been claimed again in the following quarter, it insisted that a penalty was appropriate.
 
The reason? It was simply this: it was an exceptional transaction which needed an exceptional VAT treatment, but the tax payer had decided not to obtain professional advice, and accordingly had been careless, because he took insufficient care in performing the VAT accounting function.
 
This seems very harsh indeed. It makes a point, which I have made before, that any exceptional transaction should now be the subject of professional advice, or very careful and well documented research, in order to prove that any error was not as a result of a lack of care. But it leads me to make the following basic suggestions for reform with regard to the "careless" error criteria.
 
·         Where there is only one or two period’s timing difference, and there is objective evidence that there had not been any risk to the tax revenue overall, it should not be regarded as essentially "careless", but rather as an inadvertent error (excepting, of course, cases that were deliberate).
 
·         Where the error has been discovered by HMRC after it has been corrected (on a timing basis), it should not be regarded as a careless error, except in exceptional circumstances which have to be justified, positively, by HMRC.
 
·         Where any error falls below the minimum error correction notification limit of £10,000, it should not, except in exceptional circumstances, be subject to any penalty, since this should be regarded as a threshold below which there is no serious threat to the tax revenue.
 
The essential lack of justice in this case shows just what we are facing with the application of this new penalty rule. VAT officers are too often taking the view that any error is careless unless there can be some clear reason as to why not. This is not in the spirit of the provisions as originally designed.
 
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