Penalties for VAT errors

The new penalty regime

HM Revenue & Customs say that the new penalty regime, introduced in respect of documents due to be filed after 1 April 2009, aims to help taxpayers who try to comply and to come down hard on those who don’t.

The message for taxpayers is that if they take reasonable care when completing returns they will not be penalised but if they do not take reasonable care, errors will be penalised and the penalties will be higher if the error is deliberate.

Taxes affected

The new penalties are for errors on returns and documents initially for VAT, PAYE, National Insurance, Capital Gains Tax, Income Tax, Corporation Tax and the Construction Industry Scheme.

For these taxes, penalties apply to returns or other documents for tax periods starting on or after 1 April 2008 that are due to be filed on or after 1 April 2009.

When can a penalty for inaccuracy be charged?

Two conditions must be satisfied before a penalty can be imposed

1. The document given to HMRC must contain an inaccuracy that leads to:

- an understatement of the person’s liability to tax
- a false or inflated statement of a loss by the person
- a false or inflated claim to repayment of tax

2. The inaccuracy must be careless, deliberate or deliberate and concealed.

A penalty can also be charged where, in the absence of a return, HMRC issue an assessment which is too low and the person does not take reasonable steps to disclose the under-assessment within 30 days of the date of the assessment.

How is the penalty calculated?

There is no penalty if a person takes reasonable care but submits an incorrect return. However, if the person later discovers the error but does not take reasonable steps to tell us about it, the inaccuracy will be treated as careless.

The penalty percentages are applied to the additional tax due as a result of correcting the error (known as the potential lost revenue). There is a different measure of potential lost revenue where the error results in an overstated loss:

- the penalty is up to 30 per cent of the potential lost revenue if the error is careless
- the penalty is up to 70 per cent of the potential lost revenue if the error is deliberate
- the penalty is up to 100 per cent of the potential lost revenue if the error is deliberate and the person conceals it

The penalty chargeable where tax has been under-assessed because of the customer’s failure to send us a return is 30 per cent of the potential lost revenue.

How can penalties be reduced?

There can be a substantial reduction in the level of penalty charged for unprompted disclosure of errors. A disclosure is unprompted if it is made at a time when the person making it has no reason to believe that HMRC has discovered, or is about to discover, the error.

Further reductions can be given based on the quality of the disclosure. The more a person tells, helps or gives access to HMRC the more the penalty may be reduced.

To calculate the reduction for disclosure HMRC will consider three elements of disclosure. To what extent is the customer?

- telling HMRC about their error

- helping HMRC work out what extra tax is due

- giving HMRC access to their records to check their figures


Reasonable care

Each person has a responsibility to take reasonable care. But what is necessary for each person to meet that responsibility has to be viewed in the light of their abilities and circumstances.

For example, HMRC would not expect the same level of knowledge or expertise from a self-employed and unrepresented individual as from a large multi-national company. They expect a higher degree of care to be taken over large and complex matters than simple straightforward ones.

Every person is expected to make and keep sufficient records to enable him or her to provide a complete and accurate return. A person with simple, straightforward tax affairs needs to keep a simple system of records, which are followed and regularly updated. A person with larger and more complex tax affairs will need to put in place more sophisticated systems and maintain them equally carefully.


HMRC say it is reasonable to expect a person who encounters a transaction or other event with which they are not familiar to take care to check the correct tax treatment or to seek suitable advice. They expect people to take their tax seriously.

Some penalties may be suspended

Suspension is intended to support those who try to meet their obligations by helping them to avoid penalties for inaccuracies in the future. Only a penalty for failing to take reasonable care can be considered for suspension. Suspension conditions will be agreed and set and if they are met the penalty will be cancelled. If they are not met the penalty becomes payable. The period of suspension can be for up to two years.


For example, if a careless inaccuracy is due to poor record-keeping one of the conditions of suspension could be that specified improvements are made to the way records are kept. This will help the taxpayers avoid future errors.


HMRC will consider the taxpayer’s general compliance behaviour, the level of disclosure and the nature of the inaccuracy before deciding whether to suspend the penalty.