Monday, October 31, 2011

BLOG 114


I have received an e-mail from summarising a report from the Sun. This reports that business secretary, Vince Cable, had to pay around £15,000 (the Sun actually says up to £25,000) in back-taxes and a £500 penalty for failing to register for VAT.

After that the article becomes fairly confused. It is unclear whether the penalty arises under the old system introduced by the then Conservative government in 1972 or the new system of penalties that apply from 1 April 2010 that was introduced by Schedule 41 to the Finance Act 2008 after consideration by the Finance Bill Committee of which Dr Cable was a member. I suspect that it is partly a penalty under the old system and partly one under the new as the article indicates that Dr Cable’s failure to comply with the VAT legislation came to light only when his accountants prepared his 2009/10 tax return, which must have been after the new rules came into force on 1 April 2010.

A penalty of £500 represents a penalty of under 3½% (or 2½% on the Sun’s figure).

Under the old rules, the maximum penalty was 5% of the tax. Under the new, it is anything between 0% and 30%. I have been specialising in tax for over 45 years and have never come across such a tiny penalty. Many congratulations to Dr Cable’s accountants for having agreed such a tiny figure.

However the purpose of this posting is not to congratulate his accountants but rather to point out that when Dr Cable endorsed the new penalty system (which is far harsher than the old) he obviously had in mind that a maximum of 30% should in most cases mean well under 5%. It would be highly hypocritical if he thought he was voting for a penalty of 30% on the average taxpayer, but only 3½% on himself. I have no reason to believe that Dr Cable is a hypocrite.

What I do know is that Parliament has laid down that a taxpayer cannot shrug off his responsibility to register for VAT by relying on another person, such as his accountant. It is also obvious that, as a participant in the Finance Act 2008 debates, Dr Cable should have been well aware that very harsh penalties would apply to those who ignore their VAT responsibilities. Obviously he is not even in a position to claim that he was not aware of such responsibilities.

I believe that we are all equal before the law. I imagine that Dr Cable incurred the minimum penalty by registering for VAT within 9 months of the date that he was due to register – although I again congratulate his accountants for having prepared his tax return so early in the tax year, assuming that is the case.

If anyone ought to be aware of his obligations towards the State, it is surely someone like Dr Cable, a long serving politician who not only has achieved a ministerial position by whose role embraces looking after small businesses. I do not believe that Dr Cable would have accepted a 3½% penalty if he did not believe that it was the appropriate tariff for someone like him whose business turnover fluctuates and who is too busy to set up the necessary system to monitor it on a day-to-day basis. He must surely believe that it is the right figure.

Accordingly the purpose of this article is primarily to exhort readers to challenge any HMRC claim for a penalty in relation to failure to notify liability to tax that is more than 3½% of the tax concerned. Dr Cable must surely represent the benchmark of those who are well aware of their tax obligations but not prepared to create the necessary recording systems to alert them to comply with that obligation. Indeed, the appropriate penalty for most taxpayers who notify late must surely be significantly less than Dr Cable’s 3½%.

Do I feel sorry for Dr Cable? No – except to the extent that (apart from himself) the only people who ought to have known of his discretion are HMRC and his accountant, both of whom owe him a duty of confidentiality, so someone seems to have let him down. I do feel sorry for Mr Chen (whose penalty was reduced by only 25%, not Dr Cable’s 50%) and Mr Yorletta (who was given no discount on his 15% penalty despite having acted “entirely honestly”) who were the plaintiffs in the most recent VAT late registration cases before the tax appeals Tribunal and for the other taxpayers who registered late and received a lower discount than Dr Cable.

Personally, I think that the system is unfair for small businesses (such as Dr Cable’s journalism) albeit that it has existed since 1973. It requires a taxpayer to monitor his turnover and to register within 30 days of it exceeding the registration limit. I think this unreasonable. Most small businesses (or rather micro-businesses, as when I talk of a small business I think of someone with far less than £1m of turnover whereas when Mr Cable talks of a small business I suspect he thinks of one with £25million turnover) rely on their accountant in financial matters. However they cannot do this with VAT registration, as the accountant normally comes on the scene up to two years after the event; he will not be aware of anything within 30 days of it occurring. Only the taxpayer is in a position to monitor his turnover.

I care about small, micro-businesses. I do not think that Dr Cable does. If, like Dr Cable, I had been on the 2008 Finance Bill Committee that increased the penalty for late registration, I would have tabled an amendment to provide for no penalty for a small business that registers up to a year late. That would conform with the expectations of those who understand small businesses and know that the best person to monitor turnover is the business’ accountant but that he will not know the figures until many months later. I would also have opposed the steep increase in the maximum penalty (from 5% to 30%) where registration is under 9 months late as being unreasonably harsh on small businesses. As far as I can see, Dr Cable did neither of those things.

The law being as it is, what sort of person has an excuse for late registration that deserves significant mitigation of the penalty? Is it an MP who, as such, should surely be aware of the obligations that Parliament imposed on him; who two years earlier sat on a parliamentary Committee that introduced swingeing increases in the penalties for late VAT registration; and who was the spokesman on tax for the Liberal Democrats and as such needed to be familiar with tax law; who is clearly an intelligent man with degrees from both Cambridge and Glasgow University? Or is it Mr Chen who took over a Chinese take-away near Sheffield and did not realise that he had to take account of the vendor’s turnover to determine when he needed to register; or Mr Yorletta who ran two businesses both with turnovers under the registration limit and did not realise that he had to aggregate the two?

Make up your own mind. I know what I think!



Blogger Duncan Cameron said...

HMRC current mission statement 'HMRC’s Purpose, Vision and Way' begins thus:

"Our Purpose is to make sure that the money is available to fund the UK’s public services".

So the amount of tax HMRC intend to collect is a function of government expenditure rather than the law or fairness.

Duncan Cameron

3:05 am  

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