HMRC’s use of penalties to ‘encourage’ compliance

Transfers of Businesses – Unforeseen Cost

As many will have observed, HMRC’s use of penalties to ‘encourage’ compliance and punish non compliance is becoming ever more prolific.

One area of development (if that is the right term) is in the context of what are generally termed ‘reallocations of VAT registrations.’

Often, where a business is to change entity – for example if a sole trader business incorporates or becomes a partnership etc., the VAT number of the preceding entity is retained, and therefore transferred to the new entity, usually for very good reasons.

However, one must remember that by reallocating the VAT number to the new entity, that new entity immediately becomes VAT registered. Until the reallocation happens, the new entity is unregistered. Therefore if the reallocation is delayed, there is technically a late registration, with the associated painful sounding penal consequences.

There have been a number of instances where HMRC has taken penalty action in circumstances where an entity change has occurred and the new entity has duly continued to file and pay VAT returns following the change, but failed to notify HMRC. In the past, such events drew little more than a stern letter from HMRC. More recently however, they have resulted in penalties, notwithstanding the fact that all VAT due may have been declared paid over to HMRC.

Because the penalties are based on the tax due for the late period (i.e. from the time the change should have been notified until the time it actually was), they can be significant, and sometimes are assessed under the old Belated Notification Penalty, which HMRC once used to colloquially refer to as the ‘BNP,’ before hurriedly changing their terminology to Late Notification Penalty some years ago.

Until recently, there was no Case Law on HMRC’s approach. The one case which has found its way to the First Tier Tax Tribunal is useful for those wishing to contest such penalties, but I suspect that something more substantial will probably be needed to curb HMRC’s behaviour.

I have dealt with a number of such cases, the latest of which concerned a 15-year late notification which HMRC did eventually concede, but only in the face of a Tribunal application.

A planning point to bear in mind is that if it seems advantageous to make a retrospective change, for example, creating a partnership from a sole trader business with effect from the start of the current year, and if the start of the current year is more than 30 days ago, there is every possibility that the conditions will have been created to produce exactly the kind of penalty discussed above.

Planning is required so please call Des on 0330 024 0498 or email dmm@barringtons.co.uk to arrange a free of charge initial consultation.

Author: Colin Woodward

Barringtons Director, Chartered Tax Advisor & Specialist in VAT & Customs Duties

Date: 11/07/2016