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HMRC internal manual

Civil evasion penalties for Customs, Excise and VAT

Civil evasion penalties for Customs, Excise and VAT: the rules for assessment and notification: VAT legislation

Power to assess

The power to assess amounts due by way of penalties is provided under Section 76 of the VAT Act 1994.

Accounting periods

Section 76(3) states:

  • In the case of penalties, interest and surcharge referred to in the following paragraphs, the assessment shall be of an amount due in respect of the prescribed accounting period which in the paragraph concerned is referred to as ‘the relevant period’

Subsection (3)(b) states:

  • in the case of a penalty under Section 60 relating to evasion of VAT, the relevant period is the prescribed accounting period for which the VAT evaded was due;
  • and subsection (3)(c) states:
  • in the case of a penalty under Section 60 relating to the obtaining of the payment of a VAT credit, the relevant period is the prescribed accounting period in respect of which the payment was obtained.

The law requires that in calculating the amount due by way of a civil evasion penalty, you take account of the VAT evaded in each accounting period, where possible. Your recordings must therefore show the amounts liable to penalty on a period by period basis. The amount of the penalty will be the total of the penalty amounts calculated for each accounting period.

The amount of the penalty assessment and the amount of an assessment of the tax due are not co-dependent (see Commissioners of HM Revenue & Customs v Liaqat Ali t/a Vakas Balti [2006] EWCA Civ 1572).

Time limits for making S60 penalty assessments

The making of civil evasion penalty assessments is subject to strict legal time limits set out in Sections 77(1)(a) and 77(2), 77(4) and 77(5) of the VAT Act 1994. The making of a civil evasion penalty assessment is subject to two time limits - the time limit within which the assessment must be made and the time constraint on how far back the assessment can extend.

The assessment must be made within the later of the time limits set out in 77(1)(a), S77(4) and S77(2):

  • Under S77(1)(a) an assessment for a penalty shall not be made more than four years after the end of the prescribed accounting period or importation or acquisition concerned.
  • If VAT has been lost as a result of dishonest conduct falling within Section 60(1), Section 77(4) of the VATA 1994 extends the time limit for making a penalty assessment to 20 years after the end of the prescribed accounting period in which the VAT was lost, subject to 77(5) (see 4 below).
  • Under Section 77(2) of the VATA 1994 a civil evasion penalty assessment must be made at any time before the expiry of the period of two years beginning with the time when the amount of VAT due for the prescribed accounting period concerned has been finally determined, subject to S77(5) (see 4 below).

The tax in a period is finally determined on the later of:

  • the date of receipt of a return
  • the date of issue of the VAT655 (notification of an officer’s assessment)
  • the date of any valid amendment to that officer’s assessment
  • the date of issue of a VAT657 (notification of voluntary disclosure)
  • the date of any Section 85 agreement
  • the date an appeal is withdrawn, or
  • the date of release of a tribunal decision or a judgement of the court being delivered, this includes cases where the amount of the tax assessment is upheld as originally issued.

Section 77(5) limits the 20 year rule in Section 77(4) and the two year rule in S77(2) to three years after a person’s death. Where S77(4) applies a penalty assessment which could have been immediately after a person’s death can be made at any time within three years after the death. However, it is HMRC’s policy not to issue VAT civil evasion penalties against deceased persons.

Time limits for issuing S61 notices

The issuing of S61 notices is subject to time limits set out in S771(b) of the VAT Act 1994.

A S61 notice must not be issued more than four years after the making of a civil evasion penalty assessment.