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HMRC internal manual

Business Income Manual

Value Added Tax: penalties and repayment supplement

S54, S777 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), S1286, S1303 Corporation Tax Act 2009 (CTA 2009)

HMRC can raise interest and penalty charges in connection with VAT and pay VAT repayment supplements (similar to IT repayment supplements). S54 ITTOIA2005 provides that the following payments are not deductible in computing the profits of a trade:

  1. a penalty under any of S60 to S70 Value Added Tax Act 1994 (VATA 1994),
  2. a penalty under Sch24 Finance Act 2007 (FA 2007),
  3. a penalty under Sch41 Finance Act 2008 (FA 2008),
  4. interest payable under S74 or S85A VATA 1994,
  5. a surcharge under S59 VATA 1994.

S1303 CTA 2009 contains similar rules denying deductions for the above penalties etc in calculating profits for any Corporation Tax.

Repayment supplement under S79 VATA 1994 does not give rise to any liability to Income Tax or Corporation Tax. Interest payable by HMRC in respect of certain cases of official error under S78 VATA 1994 is not within the exemption and is therefore not exempt from either IT or CT.

S72 VATA 1994 provides for the criminal treatment of VAT offences. S 152 Customs & Excise Management Act 1979 allows HMRC to compound any proceedings for an offence. In compounded cases a settlement is made on the basis of the arrears of tax plus interest, plus a figure representing a penalty.

The VAT penalties etc which can arise are:

  • S59 VATA 1994 - the default surcharge (penalties for repeated failures to make VAT returns or pay the tax chargeable in certain circumstances).
  • S60 VATA 1994 - evasion of VAT where the offence is not related to an inaccuracy in a document or failure to notify HMRC of an under-assessment.
  • S61 VATA 1994 - VAT evasion: liability of directors, etc where the offence is not related to an inaccuracy in a document or failure to notify HMRC of an under-assessment.
  • S62 VATA 1994 - incorrect certificates as to zero-rating etc.
  • S65 VATA 1994 - inaccuracies in EC sales statements.
  • S66 VATA 1994 - penalties for failure to submit EC sales statement.
  • S68 VATA 1994 - breaches of walking possession agreement (that is, an agreement not to sell or remove property under distraint, but left in the possession of the defaulter.
  • S69 VATA 1994 - breaches of regulatory provisions relating to VAT.
  • S72 VATA 1994 - criminal offences: fraudulent evasion of VAT, submission of false documents, dealing in goods of which VAT is evaded, making supplies without providing security.
  • S74 VATA 1994 - interest on VAT recovered or recoverable by assessment.
  • S85A VATA 1994 - interest on VAT payable or repayable on determination of appeal.
  • Sch24 FA 2007 - inaccuracy in return or other document, inaccuracy in a document as a result of third party providing incorrect (or withholding) information, failure to inform HMRC of an error in an assessment.
  • Sch41 FA 2008 - failure to notify obligation to register for VAT, change in supplies made by person exempt from registration, acquisition affecting exemption, acquisition of goods from another Member State and unauthorised by issue of an invoice.