Non-UK companies face penalties for errors made on their submissions for VAT refunds to the UK. HMRC take a much stricter line than most, if not all, other EU countries when it comes to errors and false submissions by non-established companies. With the deadline approaching for EU company claims (30th September) and non-EU company claims (31 December), it’s time to have a quick check of your UK VAT claim to make sure you don’t fall foul of HMRC’s penalty regime. There are some actions you can now take for submitted claims if these contain errors in order to avoid or mitigate penalties.
My career in VAT began, over 22 years ago working for a company handling non-resident VAT claims, known then as 8th Directive (for EU claimants) and 13th Directive claims (for non-EU claimants). At that time, the focus was on paper submissions, original invoices and getting the claim with the relevant certificates submitted on time. As agents, we took care to ensure claims were submitted as accurately as possible, advising clients if they needed to register for VAT in the territory and disallowing VAT on non-claimable items.
The world of overseas VAT reclaims has changed significantly since then. Claims by EU claimants are submitted electronically and repayments are made electronically. Non-EU claims are still made in original paper format but HMRC do accept email enquiries (some progress). The quantum and value of non-resident claims has reduced significantly over the years with the changes to VAT legislation (eg no longer do we have VAT charged on cross border telecom services) with Europe’s quest to simplify VAT. This has led, we believe, to a lot of companies submitting their own non-resident VAT claims.
Most companies will submit claims to the best of their ability and most will most likely take the view “if in doubt, include the invoice!” on the assumption that the tax authority will reject it if it doesn’t qualify for a refund and that would be the end of the matter. This would ordinarily seem like a sensible approach and at least the company has submitted the claim on time.
However this could earn you a penalty (usually 30% of the VAT in question) from the HMRC (UK tax authority).
What are EC and non-EC VAT claims?
Most businesses who incur VAT in connection with their activities in an EU country where they do not habitually supply goods/services (and so are not required to register for VAT) are nevertheless entitled to deduct that VAT (Articles 170-171 Council Directive 20016/223/EC).
EC Claimants – EC claimants send an electronic refund claim to their own national tax authorities who then forward it to the EU country where the claimant incurred the VAT (once they have confirmed the claimant's identity and VAT identification number, and the validity of their claim). The tax authorities in the EU country of the claim carry out certain checks and if necessary request further information. Claims need to be submitted by 30 September for VAT incurred in the previous calendar year.
Non-EC claimants - Claimants must send a paper application form, a certificate of taxable status and original invoices together with any paperwork supporting the appointment of an agent to handle their affairs to the national tax authorities in the EU country where they incurred the VAT. The deadline for submissions to the UK is 31 December following claims periods running from 1st July to 30th June. Deadlines differ in other EU countries. Typically claims must be submitted by 30th June for the previous calendar years but some countries do allow extended claim deadlines.
Some countries do not permit claims from certain non-EC countries due to lack of reciprocity.
Penalties on errors in UK VAT refund claims for EC and non-EC businesses
We have seen an increasing amount of instances whereby HMRC have issued penalty notices or what they term a “penalty opening letter” with a rejected claim. These should not be ignored.
As with all EU territories, HMRC have the powers to issue penalties (Schedule 24 of the Finance Act 2007) for inaccuracies in VAT returns and documents. A document is defined as a “return, statement or declaration in connection with a claim”.
HMRC state in paragraph 2.19 of their VAT public notice 723A – Refunds of VAT in the European Community for EC and non-EC businesses updated on 7 September 2016
“All Member States take a very serious view of incorrect applications. Refunds obtained on the basis of any incorrect application can be recovered, penalties and interest may be imposed and further refund applications suspended.”
For non-EU claimants Para 6.6 of the same notice reads:
“Warning! If your application is found to be incorrect after the refund has been paid, any overpayment will normally be deducted from your next refund. The UK authorities take a very serious view of false applications. Refunds obtained by means of a false application can be recovered, and penalties may be imposed.”
While HMRC may think that other Member States may take a serious view, they do not appear to take as serious a view as the UK. Having surveyed my colleagues of Taxand firms in Europe including Taxand Ireland, France, Finland, Luxembourg, Sweden, Germany, Austria, Poland, Switzerland and Spain, all answered that if there was an error in a non-resident VAT claim in their territory, the VAT authority would reject the refund but they would not impose any penalties.
Additionally, none had seen instances where the penalties were issued or considered in any territory with the exception of the UK. In all EU countries there are penalties for failing to correctly operate the VAT system or for careless or deliberate errors but these are usually reserved for companies who are VAT registered (or liable to be) in country. The level of penalties and their application vary across the EU, however their application does not appear to extend to non-resident VAT claimants ie those who qualify for the former 8th and 13th Directive claim process.
All were surprised that the UK would levy penalties rather than just reject the claim. This included our Swiss colleague, Laurent Lattmann of Taxpartner Taxand, who added that the Swiss authorities (who are relatively strict) do not impose penalties for unjustified claims under their VAT refund procedure. He goes on to say “this would somehow be difficult to explain as a foreign entity that is not registered for VAT can hardly be aware of the VAT law and rules”. Unfortunately, HMRC does not agree (to a point).
Many countries will apply penalties where a company should have registered for VAT, which brings them into the domestic VAT regime. Submitting an EC/non-EC VAT claim when the company should have registered for VAT can give rise to penalties in other territories more so than in the UK. This can typically arise where companies have organized events or conferences in other EU territorities. In a relatively recent example our Swedish practice Skeppsbron Skatt Taxand had a client who assessed a penalty of 100% in France.
The Swedish company had submitted an EC refund claim to France on the basis that the same supplies would be subject to the reverse charge if made in Sweden or Swedish VAT where supplied to a Swedish customer so they reasonably did not consider they should register for VAT in France. Unfortunately for this company, in France, this activity does rise to an obligation to register for VAT in France. The French authorities assessed the penalty on the output tax only rather than the net position of output tax less input tax (or potential loss of revenue to the tax authority).
In the UK, we know of similar situations where overseas companies have submitted EC VAT claims, when they should have been registered for VAT in the UK (again mainly for organizing events in the UK) and unlike the French, HMRC have not issued penalties provided the company has registered for VAT and accounting for the correct amount of VAT.
The application of penalties to persons that should be or are registered for VAT in the territory seems to be arbitrary across the EU. However, the UK appears to be in a league of its one when it comes to penalties for companies submitting an overseas VAT claim with no obligation to register for VAT.
How much are the penalties?
Unless the error / action is deliberate (ie it’s a “careless action”), the penalty is 30% of the potential lost revenue and this can be mitigated to either 15% or 0% subject to the presentation of a defence to HMRC or full disclosure.
Where the error / action is deliberate but not concealed, the penalty ranges from 70% down to 35% and 20% depending on levels of disclosure to HMRC. And where the error / action is deliberate and concealed, the penalty is 100% of potential lost revenue but can be reduced down to 50% or 30% depending upon the level of disclosure to HMRC.
We would expect that most of our reader’s errors would qualify as careless actions, which are generally defined as a failure to take reasonable care.
What to do if you receive a Penalty opening letter or a Penalty Notice?
Don’t ignore it.
HMRC first step is to reject a claim and issue a penalty opening letter, which in summary states they are considering issuing a penalty and asking for reasons as to why the error arose.
The first step to take is assess the error and co-operate with HMRC as much as possible. Take advice, preferably local. Tax payers have different approaches to Tax authorities across Europe. The approach taken in other jurisdictions may not be the approach that works in the UK.
While it may seem surprising that the UK is apparently taking the strictest line with overseas VAT claimants in Europe, HMRC have assured us they are not seeking to penalise every claimant who makes an error in their claim. They are assessing behaviours and penalising claimants who do not take reasonable care. Where claimants provide an explanation which supports that they did take care, HMRC may not proceed with the penalty. Keeping accurate records and checking with a tax advisor or the tax authority would be examples of taking care. Evidence that you have queried the VAT treatment with the supplier or colleagues would also help dissuade HMRC from issuing a penalty notice.
If HMRC are not satisfied with your responses to their penalty opening letter and they issue you with a penalty, you can take various steps to try and mitigate that penalty. These include providing information to HMRC to support them in their enquiries and also advising them of any other errors you have discovered (to reduce the penalty on those). The best approach to take will vary case by case but demonstrating you have taken reasonable care is the key to reducing the penalty to zero. Disclosing further errors can help reduce penalties to 15%.
And on a final note, it may be possible to enter into a penalty suspension regime, whereby the penalty is suspended subject to certain conditions for example an improvement in company controls and the quality of claims.
Should you still consider the penalty is not correctly due, there is a formal appeal process which may be considered.
What to do to avoid getting a penalty notice?
There are a few action points which can help mitigate the ocurrence of penalties. At a very basic and obvious level, ensuring that your claims are accurate is the starting point or at the very least keeping evidence that shows that you have tried to submit claims accurately such as:
1. Take advice from advisors.
2. Take advice from HMRC.
3. Check with suppliers if you think they should not have charged you VAT.
4. Keep evidence of all of the above.
If, when preparing this year’s claim you discover an error, which may be repeated on previous claims which are still outstanding, make an unprompted disclosure to HMRC to seek reduction of any penalties to 0%.
If HMRC have already brought errors to your attention, review your outstanding claims and submit details to them of any additional errors. This qualifies as a prompted disclosure and could reduce your penalty to 15% or open the door for a penalty suspension.
The most common errors we have seen on overseas VAT claims are:
1. Companies making claims when they should be registered for VAT – usually because of differing application of rules in different EU countries eg conference / event organizing.
2. Invoices not addressed to the claimant but to another party (but the claimant has paid the invoice).
3. Business entertainment claims – VAT on these costs is generally irrecoverable in Europe but the classification of what is business entertainment varies.
4. Items which are considered non-business expenses (Treatment can vary across the EU).
5. Where the supplier has incorrectly charged VAT on exported services which do not qualify for a domestic VAT charge. (For example, typically consultancy and legal services would not attract VAT when exported to another company but the provision of catering services would generally attract domestic VAT.)
This list is not exhaustive but gives an indication of areas to watch out for.
1. Before submitting a EC or non-EC claim – check whether you do not have an obligation to register for VAT in territory (penalties can be higher in other jurisdictions and you may miss the opportunity to pass the VAT cost to customers, who may in turn be able to reclaim the VAT).
2. Question suppliers who have charged VAT on exported services (and keep the evidence).
3. Do not ignore letters from HMRC regarding penalties.
4. Take advice.
5. If you discover you have made errors in outstanding EC or non-EC claims, notify HMRC of these errors so that you can reduce penalties.
6. If you have submitted claims that are still within the deadline period (currently 2016 claims for EC claimants and claims for the period from 1 July 2016 – 30 June 2017 for non-EC claimants), submit an amended claim to correct the error and avoid penalties.
7. Keep good records.