As your business grows it becomes even more important to take VAT compliance seriously, to help you avoid VAT non-compliance penalties that can be costly both financially and in terms of reputational damage. This second blog of our series on VAT compliance penalties explores another key imperative - accuracy.
Non-compliance penalties can be charged if a submission to the tax authorities is delayed and/or inaccurate. Several factors will impact the severity of the penalty. These include the number of VAT calculation errors, the reasons for the errors, the amount of tax due and how long the tax has been due. If, for example, there are calculation errors on VAT returns or other documents which understate the tax or misrepresent the VAT liability, penalties can be assessed by the tax authorities.
In the UK, penalties are understandably harsher if the error is proven to be deliberate, where taxpayer may have tried to conceal VAT errors or where they have deliberately misled the authorities. They can also be applied if there is a genuine mistake, but there has been a lack of ‘reasonable care’ in the VAT calculation and processing.
Misdeclaration penalties can also be imposed when businesses make false or misleading statements on other VAT-related documentation. For deliberate tax avoidance, aggressive tax evasion and fraud, VAT non-compliance may result in criminal fines, bankruptcy proceedings and, in some countries, criminal proceedings.
If You’ve Not Achieved VAT Compliance, Don’t Expect the VAT Refunds Either
VAT is indirect tax collected on behalf of the government. Businesses are legally required to charge and remit the correct amount of VAT. During a VAT audit, should a business discover they have undercharged VAT then it is typically not possible to recover the difference from the customers. The business typically pays for the assessments from its own pocket, along with any penalties and interest.
Overcharging can also lead to VAT non-compliance penalties, but perhaps more significantly it can cause reputational damage with your customers. Whilst it may be possible to refund the excess amount to your customers, you’ll need to issue credit notes and adjust your VAT return. In addition, the relationship and trust between your business and the customer is likely to suffer.
Do Your Best to Avoid Penalties
Administrative penalties are fines that are imposed for a range of VAT-related errors such as delays in or failing to:
- Register for VAT
- Maintain adequate records, or
- Comply with VAT regulations.
Vertex tax technology can help your business reduce the risk of VAT non-compliance penalties, by providing accurate tax relevant data and supporting or automating your VAT compliance processes.
Click here to read the final blog in our series.
Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.