Tax Consultant / September 23, 2017
The rules relating to penalties can also change somewhat independently of the specific rules about VAT registration. For that reason, reference should be made as necessary to the specific VAT penalties rules. Nevertheless, the following is a brief guide that applies at the time of writing and that provides some pointers.
The current penalties for failure to register on time apply as a percentage to the net payable tax.
For honest omission to register, the penalty can be as high as 30%. It may be possible to escape the penalty by reference to a “reasonable excuse”. Jurisprudence relating to “reasonable excuse” has built up in abundance over the years, but a mere oversight will not qualify as such.
By way of examples, it may be possible to argue that there was a reasonable excuse where there has been a tricky decision regarding:
• VAT liability as such (whether exempt or taxable);
• whether an activity amounts to a business;
• whether a barter arises;
• whether an imported service falls within the reverse charge; or
• anything else which presents challenges of interpretation beyond the application of the registration rules per se.
However, even here there is potential for difficulty if the entity saw an issue that could have triggered the thought of VAT but failed to canvass the point with HMRC or to take professional advice. For instance, if a barter is shown as such in the statutory accounts, or a payment is shown as having been made in the internal accounting records, but this did not trigger the response that the related VAT position ought to be considered, it is not going to be easy to establish a reasonable excuse. Nor is reliance on a third party in itself sufficient, though there is case law which indicates a boundary to this principle.
However, HMRC have the power to mitigate all the way down to zero in accordance with the “behaviours” of the taxpayer. They can (though they are not required to) set the rate at 0% for an unprompted disclosure as long as the delay is no more than 12 months, or 10% for a longer delay. An “unprompted” disclosure is one made when HMRC were not known by the entity or its advisers to be looking into the situation or where there was no reason for the entity to think that it was being looked into or about to be looked into. If the disclosure was “prompted”, then the reduction can be to 10% if the delay is within 12 months, or 20% otherwise. The likelihood of achieving these reductions depends on the level of cooperation with HMRC that the entity provides after the disclosure has been made.
For dishonest failure to register the penalties are much higher. Dishonest failure arises where it is not a mistake and where the directors (or perhaps one of them), or persons of equivalent status, knew that VAT registration was required but deliberately failed to contact HMRC. It is possible to have done this deliberately at one stage and then repent of the dishonesty later, and accordingly, bring the point to HMRC’s attention. That remains a dishonest failure to register, as the earlier dishonesty is not expunged by the later repentance, though the latter can help to reduce the penalties that apply.
There are two kinds of dishonesty, one that involves no cover-up, and one where steps are taken to cover the tracks. The penalty regime recognises the different gravity of the two. The unconcealed dishonesty merits a maximum penalty of 70% (mitigable to some degree depending on disclosure and “behaviour”) and the concealed dishonesty merits a maximum of 100%. An example of concealed dishonesty is where false documents are generated to seek to “prove” that registration was unnecessary and other forms of deliberate false accounting. Unconcealed dishonesty would be simply deliberately missing the deadline to register but doing nothing else to cover the position (such that all other aspects of the business are left as they would have been had there been no intention to cheat HMRC).
Pre April 2010 penalties
To the extent that the default goes back several years, there are different penalty rules which may be engaged in regard to tax from that period. However, this again is a subject of its own and the following is a brief overview.
All failure to register was subject to penalty unless the entity could demonstrate “reasonable excuse”. However, the penalty was more lenient ranging from 5% to 15% (via 10%) depending on whether one was up to nine months late, up to 18 months late, or more than 18 months late.
Dishonesty was dealt with in a similar manner to today, but there was not a clear distinction between concealed and unconcealed dishonesty.
Reasonable excuse case
Whilst a review of the reasonable excuse case law is beyond the scope of a book about compliance with registration rules (there being around 100 decisions), the most amusing and astonishing case on the subject cannot be passed over. Jenkinson (an old case from 1988) involved a businessman who met a man on his regular train commute and was given to believe that the latter was an accountant who would handle VAT registration for him. The man was only ever encountered on the train, and he did not ask for any payment for his services. In due course, the man gave the appellant a “VAT number”. The appellant realised, however, that he had not received a return to complete and so contacted HMRC. He was told that the number was bogus.
The tribunal accepted the contention that there was a reasonable excuse because the appellant had not merely placed reliance on a third party but had taken steps to ensure that he did receive the evidence of having been registered. He could not be blamed for having been the victim of a con trick. This is a clear precedent for the defence of having been conned, though how likely these precise circumstances would be accepted in our more sceptical era the reader can judge for himself.
Through not a penalty associated with late registration, there are provisions that enable HMRC to require a taxpayer to pay an amount of security against the possible risk of defaulting on his VAT liabilities. They often demand this at the time of registering an entity. This is determined by looking at the compliance history of previous businesses run by partners or directors of the entity. The security must be deposited as a condition of being allowed to make supplies. It is illegal to trade without paying the security.
Further information on penalties, refer to HMRC website.