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HM Revenue and Customs Brief 52/09

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HM Revenue and Customs -Tax Authorities

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Issued 24 August 2009

Guidance on VAT and Excise Wrongdoing penalties published

Introduction

This Business Brief outlines the VAT and Excise wrongdoing penalties contained in the 2008 Finance Act (FA2008). There is full technical guidance on these and other penalties introduced in FA2007 and FA2008 in HMRC’s Compliance Handbook. The guidance on these particular penalties can be found at CH90000 onwards.

Background

Under the review of HMRC's powers, deterrents and safeguards legislation has been introduced to align and modernise the framework under which HMRC administers the taxes and duties formerly handled by Customs and Excise and the Inland Revenue. The aim, developed through consultation, is to support those who seek to comply but come down hard on those who seek an unfair advantage through non-compliance.

HMRC inherited a number of different penalty regimes from Customs and Excise and the Inland Revenue. The law and practice relating to penalties varied not only between the two former departments but also between the various taxes and duties for which each department was responsible.

Finance Act 2007 (section 97 (Opens new window) and Schedule 24 (Opens new window) ) introduced a simpler and more consistent penalty system for inaccuracies in tax returns and other documents.
Finance Act 2008 (section 123 (Opens new window) and Schedule 41 (Opens new window)) has extended and adapted the new penalty framework to introduce:

  • In paragraph 1 of Schedule 41, a standard penalty regime across most HMRC taxes where a customer fails to register or notify us and as a result tax is due
  • In paragraphs 2, 3 and 4 new penalties for various VAT and Excise Wrongdoings

We will cover the failure to notify penalties in a separate Business Brief.

VAT and Excise Wrongdoing penalties

From 1 April 2010 a new penalty regime applies where any person:

  • makes an unauthorised issue of an invoice showing or including VAT
  • misuses a product so that a higher rate of excise duty is payable, or supplies a product knowing that it will be used in such a way
  • handles goods subject to unpaid excise duty.
     

The unauthorised issue of an invoice showing VAT for example occurs when someone who is not registered for VAT and who doesn’t work for a VAT registered business, issues an invoice that includes an amount shown as VAT.

The penalties relating to use of a product which leads to a higher rate of excise duty becoming payable are concerned with the various duties on alcohol, tobacco and hydrocarbon oil products (such as petrol and diesel).

An example of misuse of a product is the use of red diesel in a road vehicle. Red diesel has a lower rate of duty and is cheaper than diesel legally sold for vehicles using the roads. The use of red diesel is restricted, for example to agricultural vehicles. Commercial hauliers who misuse red diesel can obtain a large commercial advantage over their competitors. The penalties help to deter such misuse.

We can also issue a wrongdoing penalty if someone handles goods for which excise duty is payable, if the correct excise duty has not been paid or deferred.

A supplier will be liable to a penalty under this provision if they:

  • supply an excise product, and
  • know that their customer will use it for a purpose that attracts a higher duty.

Handling goods includes:

  • acquiring the goods
  • being involved in carrying, removing, depositing or keeping the goods
  • selling the goods

One example of handling goods that would lead to a penalty is buying cigarettes abroad and selling them in the UK without accounting for excise duty. Cigarettes can only be brought into the UK, without paying UK excise duty, if they are for your own use.

Reasonable excuse

We will not charge a penalty if we are satisfied that the person:

  • has a reasonable excuse for a non-deliberate act, and
  • if the excuse has ended, has remedied the act without unreasonable delay.

Reasonable excuse is likely to be an exceptional event beyond the individual’s control such as:

  • the death of a partner or close relative
  • serious illness of the person. partner or close relative

Reasonable excuse does not apply where the failure to notify or wrongdoing is deliberate.

We would not normally accept the following as a reasonable excuse:

  • lack of money
  • reliance on another person

A person who supplies a product knowing that it will be misused is liable to a penalty whether or not they consider there is a reasonable excuse for their act. The supplier knows that the product will be misused, the supply is therefore a deliberate act and there is no exclusion for reasonable excuse.

How it works

If the person is not registered for VAT, we can assess a penalty for issuing an unauthorised VAT invoice in addition to recovering the amounts charged as though they were VAT.

Where a higher amount of excise duty becomes due as a result of a product having been misused we may assess a penalty as well as recovering the duty. We may also assess a penalty on any person who supplied the product, if they knew that it would be misused.

The amount of the penalty is a percentage of the VAT shown in the invoice or the extra excise duty due from any person. The percentage is determined by the behaviour that led to the act and any attempts that were made to conceal it. If the wrongdoing was:

  • deliberate and concealed – maximum penalty 100%, minimum penalty 30%
  • deliberate but not concealed – maximum penalty 70%, minimum 20%
  • non-deliberate – maximum penalty 30%, minimum 10%.

The penalty is then reduced to take account of whether and to what extent the person has sought to disclose the wrongdoing to HMRC. This reduction depends on:

  • whether the disclosure is unprompted or prompted, and
  • the quality of the disclosure.
     
Reason for wrongdoing Disclosure Minimum penalty Maximum penalty
Reasonable excuse   No penalty No penalty
Careless Unprompted 10 per cent 30 per cent
  Prompted 20 per cent 30 per cent
Deliberate Unprompted 20 per cent 70 per cent
  Prompted 35 per cent 70 per cent
Deliberate &
concealed

 

Unprompted 30 per cent 100 per cent
Prompted 50 per cent 100 per cent

We will issue a penalty assessment. The person is entitled to a review of, and can appeal against (PDF 74K) , our decision:

  • that a penalty is payable, and/or
  • the amount of the penalty.

Agents

Where an agent is acting for a person or company, they remain responsible for ensuring that no wrongdoing occurs. Examples of agents include employees, and advisers such as tax advisers.

That means the person or company can be penalised if the agent carelessly or deliberately:

  • makes an unauthorised issue of an invoice with VAT,
  • misuses a product so that a higher rate of excise duty is payable, or
  • handles goods subject to unpaid excise duty,
  • unless the person or company took reasonable care to avoid the wrongdoing committed by their agent.

We believe it is reasonable to expect the person or company to:

  • set up systems and procedures to create and retain accurate records
  • make accurate returns
  • comply with the relevant legislation
  • refrain from any wrongdoings, and
  • meet their other tax obligations.

Company officers

Where there is evidence to identify the officer or officers who caused a deliberate wrongdoing they will be liable for payment of all or part of the penalty where:

  • there is evidence that the officer gained personally from the deliberate wrongdoing, or
  • the company is insolvent, or
  • there are grounds to suspect that the company will become insolvent, see CH98850.

Company officers are defined as a director or a secretary of the company.

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© Crown Copyright 2009.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



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Article Published/Sorted/Amended on Scopulus 2009-08-26 15:56:50 in Tax Articles

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