Is the new VAT penalty regime kinder or harsher?

The new VAT penalty regime will be harsher if you cannot demonstrate that reasonable care has been taken to pay the right amount of VAT on time.

The principle of reasonable care will vary depending upon the particular case. What will need to be demonstrated is that due consideration was taken by the taxpayer and appropriate actions were taken to treat the transactions correctly.

If a taxpayer cannot demonstrate that reasonable care was taken and the VAT liability has been understated then a rising penalty rate will be applied to the amount of VAT lost by HMRC.

If HMRC deem that the taxpayer was careless then the rate will be 30%. However if they believe that the understatement of the VAT liability was deliberate then the rate will be 70% and if they believe the taxpayer has also attempted to conceal it then the rate will be 100%.

If a taxpayer voluntarily discloses that an understatement of the VAT liability has been made before HMRC discovers or is about to discover it, then the penalty rates could be reduced. The rate for careless mistakes could be reduced to 0%, deliberate understatements of VAT liabilities to 20% while those that are deliberate and concealed could be reduced to 30%.

If a taxpayer discloses the amount following a VAT inspection or enquiries made by HMRC then the extent of the reduction will be less. The rate for careless mistakes could be reduced to 15%, deliberate understatements of the VAT liabilities to 35% while those that are deliberate and concealed could be reduced to 50%.

It is refreshing that there is a desire on behalf of HMRC to be proportionate and not penalise taxpayers who do all that can be reasonably expected of them to comply with their obligations to pay the right amount of VAT at the right time. However, if an understatement of the VAT liability is not deliberate but is deemed a careless mistake, this may also result in a penalty, even if it is voluntarily disclosed to HMRC. A Voluntary Disclosure may lead to mitigation of the penalty, potentially down to nil, though the amount of the mitigation will depend on the quality of the disclosure.

The best advice is:

• do not make deliberate understatements of your VAT liabilities; and
• if there has been a mistake on a VAT Return make sure you submit a Voluntary Disclosure as soon as possible so that you reduce the risk of a penalty.

To avoid making mistakes you need to understand all the rules and regulations of VAT. Click here if you want to know the essentials of VAT.

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