Penalties for late VAT registration are not uncommon: it is relatively easy for a business to miss the exact point at which the VAT registration threshold is exceeded. As such, taxpayers will often seek a reduction in the late registration penalty applied by HMRC.
This type of penalty can range from 0% to 100% of the VAT which should have been accounted for. Reducing these penalties would usually involve pointing out that the taxpayer had disclosed unprompted its failure to register and had neither deliberately avoided registration nor concealed its failure to do so.
In James Hillis v Revenue and Customs Commissioners ( UKFTT 196 (TC), published on 4 April 2013), the taxpayer had been late in registering for VAT. There were a number of unusual circumstances which had led to the taxpayer delaying notification until after a year, including advice received from his accountants not to approach HMRC until he had sufficient funds to pay his VAT liability. However, late registration penalties can normally only be reduced to nil if the failure is notified to HMRC within 12 months (in addition to being unprompted, unconcealed and a non-deliberate failure). As James Hillis notified HMRC more than 12 months after his failure to register, HMRC believed that his penalty could only be reduced to 10%.
The Tribunal decided to look beyond the letter of the law. In reducing the penalty to nil, the Tribunal examined Parliament’s Public Bill Committee’s minutes in order to establish what was in the minds of the legislators. It noted the following.
The report on proceedings of the HC Committee stage of the Finance Bill 2008 emphasised tax payers who have made genuine mistakes should not be deterred by fear of penalties from coming forward and regularising their affairs. Further the 12 month threshold for unprompted disclosures whilst introducing certainty was not set in stone. The HC Committee envisaged that there would be a margin of appreciation for those taxpayers outside the 12 month limit who have made an honest mistake, albeit in the form of a reasonable excuse.
At the time of writing, HMRC could still appeal this decision. In the meantime, taxpayers who have incurred late VAT registration penalties should consider whether to appeal on the grounds of “legislative intention”. If HMRC does not appeal, these grounds should also be considered in future.