Concern over harsh penalties for minor breaches of new VAT rules

The Chartered Institute of Taxation (CIOT) has called for revisions to a new government scheme to tackle VAT evasion, so that those who make administrative errors, but are not accused of involvement in tax evasion, are not penalised with what it describes as “swingeing fines”.

Businesses that store goods in the UK to deliver to UK consumers, on behalf of sellers established outside the EU, will need to register for the Government’s new Fulfilment House Due Diligence Scheme (FHDDS) this year.

HMRC hope that this new list of ‘approved’ UK fulfilment businesses will help combat growing tax evasion and non-compliance in trading in goods via online marketplaces and thereby level the playing-field for legitimate UK and overseas sellers.

The CIOT has set out a number of concerns about the FHDDS in its response to a recent HMRC consultation. Among its concerns is that, where a non-EU supplier is declaring UK VAT and duty correctly to HMRC, the ‘approved’ person or business under FHDDS could still face harsh penalties, such as of £500 for each occasion it records an incorrect import entry number of the goods stored, even if they have otherwise been fully tax compliant and have not been involved in any fraudulent supply chain to date.

Alan McLintock, chair of CIOT’s Indirect Taxes Sub-committee, said: “We support HMRC taking action to combat VAT evasion and non-compliance. Compliant retailers should not have to compete against rivals who do not pay the VAT which is properly due.

“However, we are concerned that businesses will be hit with penalties simply due to paperwork mistakes under the new administrative regime, even where there has been no lost tax to HMRC. It is likely to be the ‘little guys’ who make administrative mistakes as they may not have the administration control and oversight that larger fulfilment houses can rely on.

“We urge the Government to adopt a light touch to penalties for such errors where there is no evidence of evasion so the penalty system for the new scheme is proportionate. This is particularly important as the regime is likely to apply to EU sellers, too, once the UK has left the EU. After all, the aim of the scheme is to ensure the system is free from fraud by overseas sellers, rather than to punish ‘approved’ people for making accidental administrative mistakes.”

The CIOT is also concerned that UK fulfilment houses with compliance issues such as late VAT returns or being on time to pay arrangements could eventually lead an ‘approved’ business to lose the ‘approval’ status, potentially closing their business despite never being involved in tax evasion.