Penalties…penalties and more penalties

18 October 2021

Hanna Sandford, Manager at Aspire Business Partnership, discusses the penalties applicable to businesses under Schedule 41 Finance Act 2008 (“the Schedule”) for VAT wrongdoings. The Schedule applies to VAT, excise, and landfill tax wrongdoings but we have focussed solely on the VAT elements of the Schedule given the exacerbation of VAT enquiries.

VAT compliance is of paramount importance for any business – the repercussions of getting it wrong can be costly and reputationally damaging.

Previously I have spoken about VAT penalties under Schedule 24 of the Finance Act 2007 which are essentially penalties for incorrect returns. I also did a webinar on the penalties attributable under section 69c and section 69d of the VAT Act 1994 which relate to accusations of fraud under the infamous Kittel principle – known or should have known.

This blog is about another penalty regime, Schedule 41.  Schedule 41 is a different penalty regime which applies to VAT wrongdoings including a failure to notify HMRC of a liability to register for VAT.

For example, paragraph 5 of Schedule 1 of the VAT Act 1994 specifies that a person who becomes liable to be registered by virtue of paragraph 1(1)(a) (this is any business which at the end of any month makes a taxable supply exceeding £85,000 within one year) shall notify the Commissioners (i.e., HMRC) within 30 days of the end of the relevant month.

If that person fails to register for VAT by the relevant date, then HMRC can charge a penalty under the Schedule.

The Schedule also enables HMRC to charge penalties when someone has lost their VAT registration but continue to utilise their VAT number or continue to make a charge for VAT on their invoices.

With the use of the Ablessio principle (deregistration on the basis that the company was utilising its VAT registration for fraudulent purposes) becoming more and more prevalent, it has become important to understand the penalty position in relation to the issue of VAT invoices by an unauthorised person.

An unauthorised person is anyone who is not one of the following;

  1. A person registered under VATA 1994
  2. A body corporate treated for the purposes of section 43 of VATA as a member of a group
  3. A person treated as a taxable person under regulations under section 46(4) of the VATA
  4. A person authorised to issue an invoice under regulations under paragraph 2 (12) of Schedule 11 to the VATA, or
  5. A person acting on behalf of the Crown

Paragraph 2 (2) of the Schedule states that a person is deemed to have made an unauthorised issue of an invoice showing VAT if the person is;

  1. An unauthorised person, and
  2. Issues an invoice showing an amount as being value added tax or as including an amount attributable to value added tax

A business subject to deregistration action by HMRC is an unauthorised person from the effective date of deregistration because they no longer have a valid VAT registration.

Penalties under the Schedule are behavioural and so consideration will be given in respect of the degree of culpability and the disclosure of the wrongdoing.

Factors such as whether there was a reasonable excuse for the failure or act and also whether the failure or act was concealed from HMRC or whether the person identified the act or wrongdoing and informed HMRC freely and without any indication that HMRC were going to identify the error first.

The penalty payable under paragraph 2 of the Schedule are as follows;

  1. For deliberate and concealed act or failure, 100% of the potential lost revenue
  2. For a deliberate but not concealed act or failure, 70% of the potential lost revenue, and
  3. For any other case, 30% of the potential lost revenue

Similar to Schedule 24 and section 69c penalties, there are provisions under the Schedule to transfer the penalties to office holders.

When a VAT deregistration is notified, it is a tense and difficult time for any business. There is very rarely adequate time to process HMRC’s decision because the business requires strong, timely and conclusive actions to be made in order to protect the business’ clients, employees and any directors or shareholders.

It is important to understand the various penalty regimes which can be applied for wrongdoings in all areas of business compliance and there are certainly no better people to speak to that our team at Aspire – get in touch today and let’s have a discussion about penalties or business compliance in general.