HMRC criticised over VAT penalty decisions

Half of penalties against businesses for filing VAT late are quashed, despite appeals to overturn them being rarer but more likely to find in favour of the taxman, an accountant says.

In an analysis of HM Revenue & Customs data, 49% of the 17,200 automatic penalties it issued for late VAT filing in 2013 were found to be overturned, found UHY Hacker Young.

But where the penalty was issued by an HMRC officer, as opposed to the department's IT system, only 28% of 2,200 appeals were successful, meaning about seven in ten firms still had to pay up.

With either penalty, the onus is on the firm to seek a review and prove innocence to HMRC, whose “much harder line on VAT appeals” only permits overturning in “clear-cut” cases.

“In a lot of ‘borderline’ review cases…HMRC is now rubber-stamping the automatic penalty,” added Simon Newark, partner at UHY Hacker Young.

“HMRC seems comfortable with admitting that computer-generated automatic penalties are often wrong, but is less keen on doing the same thing for officers’ decisions.”

The tax authority is also less likely to end its VAT penalty review process, introduced in 2009, with a favourable outcome for the taxpayer, whose appeal requests are steadily falling.

In fact, only 19,400 requests from firms to review VAT penalties were recorded by HMRC in 2013, down from the 25,000 in 2012 and down further from the 37,100 in 2011.

But when firms do appeal, HMRC’s success rate is steadily rising. In particular, it ruled in favour of itself in just 37% of appeals in 2010, compared to 40% in 2011 and 52% in 2012.

Mr Newark believes the objectivity of the appeals process is in doubt, especially as the latest data (2013) show the department’s VAT penalty decisions to have been right in 54% of cases.

“The increasing proportion of VAT review decisions that HMRC makes in its own favour is one of the factors leading fewer and fewer businesses to seek reviews of officers’ VAT decisions that have gone against them,” said UHY Hacker Young.

“As the review system moves further away from its original aim of being a detailed and objective examination of potential errors, a greater number of businesses are finding that time spent battling with the tax authority over its mistakes is simply wasted.”

The accountant added that the review system was touted as a low-cost solution for businesses unable to take the more formal, costly route of going to a tribunal over their VAT bills.

“HMRC has a patchy record at tax tribunals, and is often rebuked by judges for its procedures and decision-making processes” reflected Newark. “Unfortunately, the cost of taking HMRC to a tribunal doesn’t make economic sense for a lot of businesses, and many poor or incorrect VAT decisions are left to stand for that very reason.”

Despite half of automatic VAT penalties being described as 'incorrect' (on the basis they are subsequently cancelled), HMRC claims that accepting a taxpayer's excuse for their failure to file on time does not mean that the penalty was wrongly levied.

Editor's Note: Further Reading -

HMRC takes an extra £1.8bn from VAT abusers

HMRC 'will seek to direct more firepower at VAT cheats'

Freelancers face penalties for registering late


May 20, 2014
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