Guidance

Misdeclaration and repeat misdeclaration penalties for VAT (Notice 700/42)

Find out how HMRC calculate and notify you about VAT misdeclaration and repeated misdeclaration penalties.

Detail

This notice cancels and replaces Notice 700/42 (June 2011). Details of any changes to the previous version can be found in paragraph 1.1.

1. Overview

1.1 Information in this notice

This notice explains how we calculate and notify 2 penalties, both of which were specifically designed to encourage businesses to submit accurate VAT returns:

  • Misdeclaration Penalty (MP) - which deals with large misdeclarations
  • Repeated Misdeclaration Penalty (MP(R)) - which deals with large, repeated misdeclarations

These penalties do not imply any dishonesty or any intention to evade tax. You can find further information about the separate penalty for conduct involving dishonesty in Notice 160: compliance checks into indirect tax matters.

The notice also describes how you can appeal against the liability to penalty or the amount of penalty.

This notice has been amended to include references to penalties for inaccuracies in tax returns and documents and penalties for not telling HMRC about an under-assessment. The inaccuracy penalties replace MP and MP(R) (see paragraph 1.3). The notice has also been amended to include changes to the de minimis limits for correcting errors discovered on VAT returns already submitted. Other procedural updates have also been made

1.2 Law

This notice does not have force of law but it explains how we interpret the relevant sections of the Value Added Tax Act 1994.

Section 63 - misdeclaration penalty.

Section 64 - repeated misdeclaration penalty.

Section 70 - the basis for mitigation.

Section 71 - the exclusions from reasonable excuse provided for in Sections 63 and 64.

1.3 Penalties for inaccuracies in tax returns and documents, and penalties for not telling HMRC about an under-assessment

MP and MP(R) have been replaced by penalties for inaccuracies in tax returns and documents, and penalties for not telling HMRC about an under-assessment. Inaccuracy penalties apply from 1 April 2008, but only for returns where the accounting period commences on or after 1 April 2008 with a due date to be sent to us on or after 1 April 2009. There are different implementation dates for penalties in relation to incorrect documents which are not returns.

You can find further information about the new penalties for inaccuracies in factsheet Compliance checks: penalties for inaccuracies in returns or documents - CC/FS7a and and CC/FS7b. .

MP, MP(R) and the civil evasion penalty will continue to apply to VAT returns outside of these parameters.

2. Calculating and notifying penalties

2.1 When you might face a penalty

We may issue a penalty whenever there has been a significant or repeated lack of care in preparing VAT Returns, leading to errors in the true amount of tax payable or repayable.

You may be liable to MP or MP(R) if you submit an inaccurate VAT Return which:

  • shows too little tax due
  • or claims a repayment that’s too large

You may be liable to MP (but not MP(R)) if all the following occur:

  • you’ve not submitted a return
  • we assess you for the tax due for the period
  • you fail to tell us within 30 days that the assessed amount is too low

However, both of these penalties are subject to objective tests. You can find further information on these tests in paragraph 2.3.

2.2 The penalty rate

For both penalties the rate is 15% of the amount of the misdeclaration for the period in question. However, we may reduce the penalty if there are mitigating factors. You can find further information about mitigation in paragraph 3.2.

2.3 Objective tests

Misdeclarations are subject to objective tests to determine whether you are liable to:

  • MP
  • a warning notice for MP(R)
  • MP(R)

The tests are applied to the net misdeclaration for each period in error.

Objective test for MP

If your misdeclaration is £1 million or more, or equals 30% or more of the penalty base (see paragraph 2.4) it has met the MP objective test, and you may be liable to a penalty.

Objective test for MP(R)

If your misdeclaration is £500,000 or more, or equals 10% or more of the penalty base (see paragraph 2.4), it has met the MP(R) objective test, and you may be liable to a warning notice. Or if the latest misdeclaration is one in a series, a penalty.

2.4 The penalty base

The penalty base is the amount of tax managed in the period the misdeclaration was made. It is calculated in one of 2 ways:

(a) If you’ve submitted an inaccurate VAT Return the penalty base for MP and MP(R) is the gross amount of tax – that is the output tax plus the input tax that should have been declared on your return.

(b) If you’ve not submitted a VAT Return, we have assessed you for the tax due for the period, and you fail to tell us within 30 days that the assessed amount is less than your true liability the penalty base for MP is the true amount of tax - that is the net tax due.

For example:

Output tax = £400,000

Input tax = £300,000

True amount of tax = £100,000

Gross amount of tax = £700,000

2.5 Circumstances when we may not issue a penalty

There are several circumstances where a penalty may not be issued. For example, we will not issue a penalty if you:

  • can demonstrate that you have a reasonable excuse for making the misdeclaration. You can find further information on reasonable excuse in paragraph 3.1
  • discover and disclose the misdeclaration voluntarily. You can find further information about this in paragraph 2.9

In addition, in most cases we will not issue a penalty if:

  • we discover a misdeclaration on your most recent VAT Return on or before the due date for the return for the following period, this is because you may not have had sufficient opportunity to correct errors on your latest VAT Return, we call this the period of grace relaxation
  • an underdeclaration is corrected by a corresponding overdeclaration for the same transaction in an adjoining VAT period, we call this the ‘Nil net tax’ relaxation
  • for MP, the penalty amount would be less than £300, or for MP(R), the penalty amount would be less than £30, but we may still issue a penalty mitigated below these amounts

You can find further information about mitigation in paragraph 3.2.

Exceptionally, we may still issue a penalty in these situations if, for example, you’ve been notified in writing on a separate occasion about the same or a similar error.

The period of grace relaxation cannot apply where the misdeclaration relates to Missing Trader Intra-Community (MTIC) fraud.

Even if none of these situations apply, we may reduce the amount of the penalty if there are mitigating factors. You can find further information about mitigation in paragraph 3.2.

2.6 What happens if the MP(R) objective test is met

If the misdeclaration happened within the 5 VAT periods prior to its discovery, we’ll issue you with a warning notice on Form VAT 670. This is known legally as the penalty liability notice.

If, within the 8 VAT periods following the warning notice,2 further misdeclarations meet the test, MP(R) will be charged on the second and subsequent misdeclaration.

We’ll tell you in writing about the penalty. You can find further information about the notification procedures in paragraph 2.7.

Misdeclarations large enough to breach the MP tests, will be liable to MP rather than MP(R).

2.7 What happens if I you’re liable to a penalty

We will notify you in writing of your liability to a penalty and explain:

  • which misdeclaration made you liable to the penalty
  • the period liable to penalty
  • the tax amount liable to penalty
  • the amount of any mitigation allowed
  • the amount of any penalty previously assessed for the period
  • the total amount of penalty for the period
  • how and where to make payment

2.8 Misdeclarations that meet both the MP and MP(R) tests

We’ll not assess for both MP and MP(R) at the same time.

If a misdeclaration meets both objective tests, we’ll only issue a Misdeclaration Penalty (MP). You can find further information about the objective tests in paragraph 2.3.

2.9 Correct a misdeclaration you’ve discovered

You’ll not receive a misdeclaration penalty if you discover and correct the misdeclaration voluntarily, before HMRC start enquiries into your tax affairs.

However, you may still be liable for a civil evasion penalty.

There are 2 methods for correcting errors you’ve discovered on VAT returns already submitted. For errors discovered for periods commencing on or after 1 July 2008 where the due date for the return period in which you discover the error is before 1 April 2009 the MP/MP(R) regime applies.

You can adjust your VAT account, and include the value of that adjustment in your VAT return for the period of discovery, if, during a return period, you discover errors on previously submitted VAT returns with a net value of £10,000 or less, or, if greater than £10,000, the error does not exceed £50,000 or 1% of the box 6 VAT entry on the return for the period of discovery.

You must advise the relevant VAT Error Correction Team (VATECT) in writing of all underdeclarations and overdeclarations in each VAT period if, during a return period, you discover errors on previously submitted VAT returns with a net value of more than £50,000, or if greater than £10,000, the error exceeds 1% of the box 6 VAT entry on the return for the period of discovery.

You can find further information about adjusting returns and making error corrections in Notice 700/45 how to correct VAT errors and make adjustments or claims.

For accounting periods starting on or after 1 July 2008 where the error is discovered in an accounting period where the due date is on or after 1 April 2009 the inaccuracy penalty regime applies. The error correction provisions and references to the related inaccuracy penalty provisions are published in Notice 700/45 How to correct VAT errors and make adjustments or claims.

2.10 How long is the grace period

The length of the grace period depends on the type of return. For example, for periods ending 31 March 2001:

Type of return End of grace period
Monthly returns 31 May 2001 (2 months)
Quarterly returns 31 July 2001 (4 months)
Annual returns 31 May 2002 (14 months)
Final returns 3 months after the due date

3. Reasonable excuse and mitigation

3.1 What we mean by reasonable excuse

If we or an independent tribunal agree that there’s a reasonable excuse for the misdeclaration, you’ll not be liable to a penalty.

There’s no legal definition of reasonable excuse but we will look closely at the circumstances of each case and the conduct that led to the misdeclaration.

If you can show that your conduct was that of a conscientious business person who wanted to comply with VAT requirements, there may be a reasonable excuse.

We will consider factors such bereavement or serious illness that have adversely affected your business.

Any decision to accept reasonable excuse will be based on all the circumstances of your individual case.

What is not a reasonable excuse

Genuine mistakes, honesty and acting in good faith are not accepted as reasonable excuses for penalty purposes. And the law provides specifically that you do not have a reasonable excuse if:

  • you cannot afford to pay
  • or you relied on some other person to perform any task for you

If the circumstances of your case fall short of reasonable excuse, there may still be grounds to mitigate (reduce) the penalty. You can find further information about mitigation in paragraph 3.2.

3.2 Mitigation

A penalty can be reduced if there are mitigating circumstances that fall short of a reasonable excuse.

Like reasonable excuse, the law does not define the grounds for mitigation but it specifically excludes:

  • your lack of funds to pay any tax or penalty due
  • the fact that little or no tax has been lost
  • the fact that you or a person acting on your behalf acted in good faith

When we consider mitigation we’ll consider all the facts which led to the misdeclaration. The amount of mitigation allowed will depend on the specific circumstances of your case. We can mitigate MP and MP(R) to nil but this will only happen in exceptional cases.

4. If you disagree with a penalty

If you disagree with our decision to charge you a penalty or the amount of the penalty we have charged, you can either:

  • have your case reviewed by an officer not previously involved
  • have your case heard by an independent tax tribunal

If you opt to have your case reviewed you’ll still be able to appeal to the tribunal if you disagree with the outcome.

If you want a review you should write to us within 30 days of the date the penalty notice was sent to you, giving reasons why you disagree with our decision. You do not have to write to us yourself. An accountant of adviser can do this on your behalf.

You can find further information about appeals and reviews on the HMRC website or you can contact VAT: general enquiries. You can also find out more about appeals to the tax tribunal.

Your rights and obligations

Read Your Charter to find out what you can expect from HM Revenue and Customs and what we expect from you.

Help us improve this notice

If you have any comments or suggestions to make about this notice, please write to:

HM Revenue and Customs
Tax Administration Advice Team
8th Floor Imperial Court
2-24 Exchange Street East
Liverpool
L2 3PQ

Please note this address is not for general enquiries.

If you need general help with this notice or have another VAT question you should phone our VAT helpline or make a VAT enquiry online.

Putting things right

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If you’re still unhappy, find out how to complain to HMRC.

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Published 6 November 2012