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MTD and VAT penalties: the plot thickens

Les Howard has some troubling questions regarding the Revenue’s power to issues penalties under the new MTD regime

I’VE BEEN THINKING ABOUT Making Tax Digital (MTD), and asking myself how VAT penalties will be affected by MTD.

In a worst-case scenario, will the end goal of the whole MTDfB process be that HMRC will be able to undertake virtual audits, and be able to review accounting data in real time? Will they be able and allowed to log in to taxpayers’ records and identify transactions which they consider are wrong? If there are errors, then presumably penalties may arise.

We already see assessments and penalties based on figures disclosed on VAT returns without a visit or taxpayer meeting.

So, will HMRC be able to raise an assessment with penalties, using their virtual login, and before a VAT return has been submitted? Will an incorrect entry in the ‘electronic account’ be capable of assessment?

My consideration of the legislation and HMRC guidance leaves me concerned that there is a real likelihood that assessments and penalties may arise on errors even before a VAT return has been submitted.

The legislation introducing the penalty regime is found in FA 2007. S97(1)(a) reads: “Schedule 24 contains provisions imposing penalties on taxpayers who make errors in certain documents sent to HMRC…” So far so good.

But HMRC guidance at CH81050 reads: “The law on penalties for inaccuracies provides a wide definition of ‘giving a document’ to HMRC. Communicating information to HMRC in any form and by any method is included.” Does this include granting HMRC access to accounting records, albeit by legislative obligation?

A ‘document’ is defined quite widely under Sch 24, para 1(1)(a). This includes returns made under Sch 11, para 2, and any “return, statement or declaration in connection with any claim”. Sch 11, para 2 includes regulations in relation to record keeping generally. MTD regulations are made under this provision.

Guidance in HMRC Compliance checks series CC/FS7a contains a similarly broad statement: “We may charge you a penalty if you send us a return or other document that contains an inaccuracy.” Does this include your ‘electronic account’ to which HMRC have access? I think so.

The key phrase that leads me to this conclusion is the use of “potential lost revenue,” not simply “lost revenue.” This has been held to include VAT which has been delayed; for example, output tax declared late. I note the concluding comment in Fritz Bender Metals (UK) Ltd v The Commissioners of Customs & Excise – [1991] VATTR 80:

“I therefore decide this issue in favour of the Commissioners. In reaching this conclusion I derive support from the wide meaning of the phrase ‘loss of tax’ in section 88 of the Taxes Management Act 1970, see R v General Commissioners of Income Tax for Holborn, ex parte Rind Trustees ([1975] QB 517) where Lord Widgery CJ said that the phrase was wide enough to include tax the payment of which was ultimately secured but the payment of which was delayed for an unreasonable time owing to the default of the taxpayer.”

Even though this case addressed a previous definition, “tax which would have been lost” (FA 1985, s14), I think the same conclusion would be reached under the current legislation.

Conclusion

Suppose HMRC login to the inputs side of my electronic account and identify a sum of input tax which should not be claimed. They will be able to raise an assessment for the amount of the error, and then a penalty. If I can point to a process by which I routinely check the accounting entries, then I can argue that I have taken reasonable care in the preparation of my records, and thus avoid a penalty entirely. But I will need to be able to evidence such checks.

Where taxpayers have data entry from multiple locations, such checking will become a more important part of their processes. Whether such checks have to be made quarterly rather than annually as part of an audit is a question for each taxpayer to address.

This article was supplied by Les Howard, VATadvice.org. This article first appeared in HMRC Enquiries, Investigations & Powers magazine.

By HMRC Enquiries Investigations & Powers Magazine

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