The powers of VAT officers are wide and provide for access to business premises and to business records, but they do not allow officers to search premises or to demand access to private papers - unless, of course, they have obtained the requisite search warrant.
The powers available to the VAT officer come, in the main, from Schedule 11 to the VAT Act 1994.
The powers are outlined in a notice published by Customs (700/52/03), and can be summarised as follows:
\ Power to require a security payment or guarantee if they consider that tax might go unpaid.
\ Power to remove and sell goods to cover unpaid VAT.
\ Requirement for a business to produce information and documents relating to its own or someone else's business.
\ Power to take samples.
\ Right of entry and inspection to business premises at any reasonable time.
\ Right of access to computers and recorded information.
Penalties There is a wide range of penalties available to Customs. Some are automatically applied by the control systems in place and require human intervention to withhold or withdraw them; others are discretionary and may be imposed only where Customs consider this to be appropriate.
Penalties range from those for dealing with cases of fraud, which can range from imprisonment for up to seven years and a penalty of any amount - a typical starting point at one end of the scale is three times the amount of tax - to a daily-rate fine of as little as £5 per day for the breach of certain regulatory provisions at the opposite end of the scale.
The penalties that businesses are most likely to see applied are those that relate to the late payment of VAT returns or the making of a
significant error on a VAT return. These are called the Default Surcharge and the Misdeclaration Penalty respectively.
Default Surcharge This is an automatic penalty and is imposed where a business is late in paying its VAT. The law requires a business to submit its VAT return and pay its VAT by the date specified on the return. Seven additional days may be allowed if payment is made electronically. If the payment is not received by the due date, the tax-paying business will be in default and a penalty may be applied.
The first time a business is in default no penalty will be imposed, but a Default Surcharge Liability Notice will be issued. This advises the business that if it defaults again with another VAT return within the next 12 months, it will incur a penalty.
The penalty for a second default is 2% of the outstanding tax; for a third default it is 5%; for a fourth 10%; and for a fifth or subsequent default it is 15%. Each time a default is recorded a Default Surcharge Liability Notice Extension is issued extending the default period to 12 months from the last default.
A business must pay all of its tax for a period of 12 months for the penalty liability notice to lapse and for penalties to drop from the ratchet effect of the incremental scale.
Customs, or the VAT and Duties Tribunals on appeal, may accept a reasonable excuse to remove the default surcharge. But, to be successful, the excuse must be based on an unexpected event that a reasonable businessman could not have foreseen.
Misdeclaration Penalty A penalty of 15% arises where a business has made an error in its VAT accounting which results in underpayment of VAT which has not been disclosed to Customs before they discover it - usually on a VAT inspection. It can also be applied where a business has paid an assessment, perhaps made in the absence of a VAT return, and the actual amount payable is higher than the assessment and the business has not notified this to Customs within 30 days.
The penalty is not imposed where the amount of missing tax is less than £1,000,000 or less than 30% of the amount of tax for the period. Customs will not normally impose a penalty where the penalty would be less than £300 or if there is a compensating error in the next VAT return.
As with the Default Surcharge, a reasonable-excuse defence can be used to remove any penalties.
Repeated Misdeclaration Penalty This penalty can be applied by Customs where there is a history of misdeclarations being made by the business. Errors of £500,000, or 10% of the amount of tax due for the period, will attract a penalty of 15% of the error if Customs have issued a penalty liability notice.
Failure to notify Failure to notify certain events or obligations to Customs attracts penalties on the tax that ordinarily would have been paid on a sliding scale. The scale starts at 5% for the first nine months since the failure arose, rising to 10% for the next nine months, and reaching 15% after 18 months.
This is most commonly encountered by businesses which fail to tell Customs they are liable to be registered for VAT.
Again, mitigation is possible with the defence of reasonable excuse.
Civil evasion Where the above penalties arise, Customs have the option of imposing a Civil Evasion Penalty (CEP) if they consider the conduct of the person or persons involved is dishonest. The CEP requires a more rigorous approach by Customs and will usually involve a formal meeting with those responsible for the business.
CEP penalties are based on an amount equal to the tax, but will be mitigated for an early and truthful explanation for the arrears, co-operation in substantiating the correct amounts, and attending interviews and producing information.
With full and frank disclosure and co-operation it is possible for the penalty to be reduced to 20% of the missing tax.
The standard of proof required for a CEP is "on the balance of probabilities", which compares with the standard of proof required for a criminal prosecution, which is "beyond reasonable doubt".
Fraudulent evasion In cases which Customs consider involve Fraudulent Evasion of VAT, either by the person who has benefited or by someone whom Customs consider has been knowingly concerned with the evasion, they may mount a detailed investigation to establish the offence, with the aim of taking prosecuting action or offering settlement on payment of a compounded penalty. Such compounding would normally be on the basis of three times the amount of the missing tax, although some mitigation may be allowed.
Such cases will usually involve a long and detailed investigation on the basis that Customs would be prepared to prosecute the case before the courts.
The penalties on conviction can be of any amount and can lead to imprisonment for up to seven years.
Other penalties There is a range of what might be explained as lesser penalties, which often involve a daily-rate element and various different maximum and minimum amounts. Penalties can be incurred for actions such as failure to notify the need for cancellation of registration; failure to keep proper records; failure to furnish information or produce documents; failure to submit accurate EC sales lists; failure to submit EC sales lists; and providing certificates for zero-rating which are incorrect.
Stephen James is an Associate Director with Chiltern Plc.