Don’t get caught in the VAT penalties net

The 50th anniversary of the UK’s introduction of VAT was earlier this year, but despite being around for a while, many VAT-registered businesses still find VAT too complex and confusing. No surprise then, that more businesses than ever are getting hit with penalties for inaccuracies.

Inflation and frozen thresholds

Two things that are not helping are the high rate of inflation combined with a freeze on various VAT thresholds.

Since 2017, the registration threshold has been £85,000, so with the increased prices it is easy for a business to become liable for VAT despite staying the same size.

Meanwhile, the thresholds for remaining within the flat rate, cash accounting and annual accounting schemes, have remained virtually unchanged for around 15 years, so, again, it is easy to mistakenly continue with a scheme when no longer eligible to do so.

Beware penalties

With HMRC aiming to close the tax gap for VAT, the risk of penalties for inaccuracies will only increase; for 2021/22, the number of penalties issued was already substantially higher than for the previous year, a trend which is sure to continue.

HMRC is able to charge a penalty of up to 30% of the extra VAT due if an error arises due to lack of reasonable care.

In HMRC’s view, it is reasonable to expect a business to find out about the correct VAT treatment or to seek appropriate advice when encountering a transaction with which they are not familiar.

A ‘get out of jail’ card?

Incurring such a penalty is somewhat careless. However, there may be a ‘get out of jail’ option if this arises.

HMRC have the discretion to suspend a penalty, for a period of up to two years, during which time a business must comply with certain conditions. The aim is to prevent further penalties in the future, so a business could, for example, be asked to improve its record keeping.

If this is done, the penalty will be cancelled at the end of the suspension period, but it would be best to avoid such a scenario in the first place.

HMRC’s guidance on VAT errors can be found here or you can contact me at or on 0141 272 0000 for professional guidance – and avoid needless penalties.

About the author

Iain deals with all VAT technical issues including transactions relating to land & property, charity VAT, international supplies, construction, VAT registration issues and the VAT liability of various goods and services.

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