08 Jun 2016
We at Croner Tax have been aware for some time that HMRC are applying the letter of the law and charging penalties in cases where there is a late notification of a change of legal entity, but now a VAT Tribunal has criticised this policy.
The legislation states that a person who becomes liable to register for VAT by taking over a business as a going concern must notify HMRC of this fact within 30 days of the transfer date: failure to so can render the person liable to a penalty unless there is reasonable excuse. HMRC’s current policy seems to be to charge a penalty even where all returns and payments have been made on time. HMRC calculate the penalty based on the potential lost tax i.e. the VAT due from the date the notification was required up to the date notification was made.
This was the case in J&W Brown (TC05101). Mr Brown ran a business as sole trader completed his VAT returns and paid VAT due on time. In November 2012 his son Kenneth became a partner in the business, however, Mr Brown continued to submit his VAT returns and pay the VAT due as a sole trader and did not inform HMRC of the change of legal entity until July 2014. HMRC deemed the notification in July 2014 to be a late VAT registration by the partnership. When a notification is more than 12 months late HMRC can impose a failure to notify penalty of between 10 and 30% of the VAT due. In this case HMRC issued a penalty of 18% of the VAT due by the partnership from November 2012 to July 2014.
HMRC did mitigate the penalty by a further 70% down to £582 to reflect the fact the VAT returns and VAT due for the periods in question has been submitted and paid by Mr Brown as a sole trader meaning there was no loss of tax for HMRC. However, the issue was referred to the First Tier Tribunal. The Tribunal noted that the issue “was one of the merest technicality a minor administrative hiccup involving minimal culpability, causing no revenue loss and no administrative inconvenience to HMRC”. The Tribunal reduced the penalty to just £100.
We believe that HMRC will reduce penalties where they are challenged by a taxpayer, although rather than mitigate them completely the reduction is often to a level that they are not worth appealing. Our litigation expert, Glyn Edwards, has had success in challenging HMRC on this issue, negotiating a penalty reduction of over £10k of VAT. If you require assistance in mitigating penalties, please call one of our VAT specialists on 0844 561 8101. Please remember that our service can extend to written consultancy at a rate of £180 per hour plus VAT.
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