When do you get a penalty?
Any under-declaration of VAT could potentially attract a penalty. The level of penalty broadly depends on whether an error was careless or deliberate but not concealed, or deliberate and concealed. The standard penalty for a careless error is 30% of the potential lost revenue, increasing to 70% if the error is deliberate but not concealed, and 100% if the error is deliberate and concealed.
How to reduce the level of penalty
There are reductions from the standard penalties for disclosure, which are relatively well known. The level of reduction broadly depends on whether the disclosure is ‘prompted’ or ‘unprompted’.
For example, the standard penalty for a careless error is 30%, but if the error is disclosed to HMRC without prompting, the penalty can be reduced, potentially to zero. If the error is disclosed after prompting by HMRC (e.g. during an enquiry), the standard 30% penalty can potentially be reduced to a minimum of 15%. However, there are two further circumstances in which penalties can be reduced – special reductions and suspended penalties.
Special reductions are available when there are special circumstances that should be taken into account when setting the level of penalty. Special circumstances occur where there are either uncommon or exceptional facts that should be considered, or where the strict application of the penalty laws produce a result that is contrary to the clear compliance intention of the law.
There have been recent Tribunal cases on whether penalties should be subject to a special reduction and HMRC has been shown to be “flawed” in their decision making process when assessing if there were special circumstances. One example was White v Revenue & Customs  UKFTT 364 in which the penalty was reduced to 6% by the Tribunal.
HMRC can suspend penalties in suitable cases involving careless error. However, this action does not normally apply where the error was a one-off. With a suspended penalty certain conditions are applied by HMRC, which the taxpayer must adhere to for a specified time period – normally between 3 and 12 months. If the taxpayer complies with the conditions, and no further errors are identified, when the period of suspension ends the penalty is waived.
There is some fairly detailed guidance on penalties for errors and whether penalties should be suspended in HMRC’s Compliance Handbook Manual (www.hmrc.gov.uk/manuals/chmanual/CH80000.htm). Of course, the guidance only provides HMRC’s view on the subject, and does not carry the force of law. A useful point that is made in this guidance is that they must consider suspension of the penalty for every penalty involving a careless error. So always ask if HMRC has considered suspending the penalty because if they haven’t their decision making process is flawed and a Tribunal would probably throw out the penalty.
Practical Tip :
Remember the old adage that “if you don't ask, you don't get”, so ask HMRC for penalties to be suspended in cases of careless error, where the circumstances seem appropriate. In addition, check whether HMRC has considered the special reduction in penalties. In each case, be prepared to argue for a reduction and/or a suspension in penalties if it appears justified. Also be prepared to lodge an appeal if the outcome of discussions with HMRC is unsatisfactory.