We have recently been appointed to act for a VAT registered company. While its main trade is that of an architect, the company also owns a number of residential properties, and receives exempt rental income. The company is therefore partially exempt.
Their previous accountant prepared and submit the VAT return as agent, carrying out the partial exemption calculations, including attribution of input tax, turnover calculation and the deminimis test. Unfortunately, the deminimis test was not correctly applied when the last VAT return was prepared, and exempt related input tax of £5,000 was recovered in error. The reclaim resulted in a VAT compliance check by HMRC. They are suggesting this is a careless error and are looking to apply (and admittedly suspend) a 15% penalty.
Has our new client really demonstrated careless behaviour when he relied on his accountant to prepare the return on his behalf?
HMRC’s internal guidance in relation to the penalty behaviours is contained within the Compliance Handbook. Section CH81130 is titled: Penalties for Inaccuracies: Types of inaccuracy: Inaccuracy despite taking reasonable care.
The guidance in this section states “Where an inaccuracy in a document has been made despite the person having taken reasonable care to get things right, no penalty will be due”. The guidance goes on to provide examples of situations where a penalty would not be due. These include “acting on advice from a competent adviser which proves to be wrong despite the fact that the adviser was given a full set of accurate facts”, and a link is provided to section CH84530
In cases where an agent such as a tax accountant is acting on a person’s behalf, the officer should focus on the behaviours of the persons whose return or document is inaccurate. The implication here is that the behaviours under review are those of the taxpayer (your client) not you, the agent, acting on their behalf.
On the basis that our client gave his old accountant all of the information required to prepare the VAT return and partial exemption calculation, their behaviour in this case, requesting their competent adviser to prepare their VAT return, does not demonstrate careless behaviour, and we will challenge the HMRC penalty assessment on behalf of our client.