Careless or deliberate penalties?

How VAT penalties are calculated

How VAT penalties are calculated depends on how the error came about.  How did you come to make the mistake?  Essentially whether the VAT error was careless or deliberate.  

The question of when an error should be treated as being deliberate versus careless is a crucial one to answer as it dictates the rate of penalty that HMRC can apply to a VAT error.  However it is a very difficult question to answer and one that HMRC tend to not be overly generous around.  To avoid having a penalty imposed that is just too high you need to understand how to decide whether someone is liable to careless or deliberate UK VAT penalties.

The general concept is that in order for an error to be ‘deliberate’, (and therefore liable to higher penalty rates) an error must have been made consciously or intentionally.  This approach would generally have led you towards a reasonably objective view.  However the previous case of Scott (2019 TC 07228) casts doubt on this being an altogether reliable approach which is always a worry.

Mr Scott, a sole trader, had been registered for a long time and therefore really ought to have known the rules.  However, even if he did know them, he clearly didn’t follow them nor did he use any accounting software, bookkeeper or accountant to help him.  An inspection from HMRC found he had made a lot of both input and output errors, in particular failing to declare VAT on UK sales despite adding VAT to his sales invoices. 

So should he be liable for careless or deliberate UK VAT penalties? Despite enduring a series of distressing family events, by not taking any steps to ensure that the VAT returns submitted were accurate, the First Tier Tribunal considered that Mr Scott’s failure to declare the right amount of VAT on his sales was so ‘fundamental’ that his actions had to be considered as having been deliberate. 

“The fact that output tax charged on an invoice should be declared on a VAT return and the VAT paid to HMRC is such a basic concept of the VAT system that anyone registered for VAT should be aware of it. The fact that no output tax was ever declared is an error so fundamental that Mr Scott must indeed have closed his eyes to the true position.”

This approach should be seen as an important lesson to all taxpayers.  What might have easily been thought of by most people as being a careless mistake could now easily be characterised as a deliberate error and liable to much higher penalty rates. If you find yourself in similar hot water, please give us a call and we will be happy to help.

Posted in VAT Appeals.