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HMRC internal manual

VAT Civil Penalties

HM Revenue & Customs
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Misdeclaration penalty: Factors that may affect the penalty: Insolvent traders

Please note: VAT Misdeclaration Penalty has been replaced by the Schedule 24 inaccuracy penalty for all accounting periods where the return period commences on or after 01/04/2008 and the due date is on or after 01/04/2009. Misdeclaration penalty will still apply where the due date is before 01/04/2009.

Please see the Compliance Handbook CH80000 Penalties for Inaccuracies for further details.

The assessment of a misdeclaration penalty (MP) for insolvent traders depends on whether the period is before or after the date of insolvency or receivership.

Formal Insolvencies

All insolvencies except for Administration Orders and voluntary arrangements

  • Period is before date of insolvency/receivership

You should manually calculate whether any MP is due. The tax assessments for these periods are not made on a VAT 641, so the mainframe does not test the period for MP. If MP is considered to be due you should assess the tax and penalty in accordance with the letter in the AEC Assessment and Error Correction Manual (see the section on ‘Making assessments to insolvent traders’). The trader’s copy should be issued to the Person in Charge, a copy retained in the folder and the third copy sent to the controlling office for the insolvency which can be found on the VISION insolvency screen.

  • Period is after the date of insolvency/receivership

Tax for these periods should be assessed on a VAT 641/642 in the normal way with the MP inhibit signal set to prevent the triggering of MP. If MP is triggered then it should not be assessed and you should process a VAT 643 to set the MP inhibit.

  • Effect of processing assessments or voluntary disclosures for periods after the date of insolvency/receivership

Following the setting of the insolvency indicator, any assessments affected by the indicator will be notified to the local office on a D1972 report. You should check the trader’s folder to establish whether an MP has been assessed for periods after the date of insolvency. If MP has been assessed you should contact the controlling office for advice.

Informal insolvencies

Administration Orders and Voluntary Arrangements, Codes 5 and 7 on the insolvency suite

MP is charged for informal insolvencies for periods pre and post the date of insolvency.

The VAT641 will trigger the D2211 provisional penalty report for pre and post insolvency periods as informal insolvencies remain on the VAT mainframe.
Note: If a post insolvency date tax assessment is input to the VAT mainframe before the input of the VAT769 insolvency form, any penalty will be deleted from the ledger. It will be necessary to reinstate the penalty using the VAT 291 form.