Almost every time that I teach a seminar, someone asks a question like “What are the chances of getting caught?” or “I have never been penalized – why would I bother with a VAT strategy?”.
My former colleague Jim Burberry, who is now a VAT partner at RSM in the UK, commented on the following – unfortunate – situation.
A UK VAT group had an annual VAT liability of 4 billion sterling (!), but nevertheless ran a deficit in that year of 9 million. The year was 2012, a leap year (like 2016!). The VAT payable over the preceding filing period was due on February 29, but the company missed that date and paid the VAT only one day late, on March 1.
HMRC imposed a routine penalty, which is a percentage point of the unpaid VAT. Depending on the circumstances (think recidivism), the percentage can be anywhere between 5% and 25%. But in any event the penalty – like everything in VAT – does not depend on the profitability of a company.
The penalty was UKP 277,185 was probably relatively small compared to the company’s total expenses. But it was still an unnecessary expense, incurred in a loss situation where the company was probably in cost-cutting mode anyway.
‘Every case is determined on its merits, but the tribunal’s decision underlines how important it is for companies to be on top of all their VAT payments to the taxman.
‘This decision also suggests that it would be extremely hard to identify a situation in which the size of a penalty could be challenged on the basis of proportionality. This should serve as a warning to others, particularly businesses with significant VAT liabilities.’
In this day and age, I find it unbelievable that a company with billions in sales does not have the capability to monitor their VAT position in real time, and ensure timely payment (or reclaim) of the correct VAT amount.
With the various competing tax monitoring tools that are available, all ERP systems can be upgraded to include at least the barest of reporting tool or dashboard. Implementing these tools are not invasive upgrades that take months to get running, but these are rather straight-forward databases. All depending on the scope and breadth of the organization, of course.