The taxman has taken a softer line on the operation of the ‘delayed tax’ provision of the new penalties for inaccuracies.
In 2009 new penalties were introduced for inaccuracies in Tax Returns or other documents sent to HMRC. Under these penalties, if a return contains an inaccuracy that relates to a timing error which is automatically reversed in a subsequent tax period, the penalty is not calculated on the full amount of tax underpaid in the first period, but on a reduced amount to take account of the timing error. The penalty is not charged on 100% of the so called “Potential Lost Revenue” as is normal, but only on 5% of it.
For example, if someone reclaims £100,000 VAT on a purchase in period 1 when it should have been reclaimed in period 2, they claim £100,000 too much in the first period but £100,000 too little in the second. Any penalty for the overclaim in period 1 is not calculated on the £100,000 but on 5% to take account of the automatic reversal of the inaccuracy in period 2, so a penalty of 20% of the tax is actually charged as (£100,000 x 20%) x 5% = £1,000.
Until now HMRC’s approach has been that in order for the penalty to be calculated in this way, the customer had to have submitted both the return containing the initial inaccuracy, and the one containing the automatic reversal of the inaccuracy in a later period. This means that in some cases HMRC has charged a penalty on the full amount because they acted to correct the inaccuracy on the first return before the second return could be submitted, thereby preventing the inaccuracy from being reversed.
HMRC is changing its approach for cases where HMRC intervened to correct the inaccuracy before the second return was received, preventing the inaccuracy from being reversed. When HMRC are satisfied that, but for their intervention, the inaccuracy would have been automatically corrected in a subsequent return, customers will receive the reduced penalty based on the rules for delayed tax. HMRC will shortly update its guidance to reflect this.
This only applies to timing inaccuracies, those that are automatically reversed in a subsequent period after they are made without you having to do anything more. It does not apply to the VAT Error Correction procedure nor to compensating but unrelated inaccuracies.
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