New penalty system for underpaid tax

A number of large changes have been recently introduced in the area of penalties on underpaid tax. The changes are of particular interest in the area of VAT as VAT is a transaction based tax. Therefore a single repetitive error over a period of years can expose a business to significant penalties.

In 2002, Revenue published a Code of Practice on Revenue Audits. This stood outside the legislation but was heavily relied on by practitioners and tax payers. However, under the Finance Act (2 ) of 2008 (passed in December 2008 ), Revenue was to put the Code of Practice into law. This was eagerly awaited by practitioners as they expected this to be a positive move for the taxpayer. However, the new legislation differs from the previous code in a number of important areas.

The new law has not provided for the opportunity for the taxpayer to make a verbal disclosure voluntarily in return for reduced penalties and non publication. Under the new law, the taxpayer must present a disclosure on tax errors in writing together with a cheque payment of the underpaid VAT and interest (but not penalties ) in order to be excused from possible publication.

The recent rules include a new power for Revenue in cases where agreement of penalties cannot be reached or where penalties have been agreed but not paid by the taxpayer. Where Revenue issue a written Notice of Opinion to the taxpayer on the penalties due and no response is received for 30 days, Revenue can refer the matter to a District, Circuit or High Court for it to be resolved. Any court proceedings must be held in public court. This is a new change which is less attractive for the taxpayer as up until now such matters could be heard by the Appeals Commission in private.

The old Code of Practice was more flexible in determining the category of default by the taxpayer as both the amount of underpaid VAT and the seriousness of the error were taken into account. The new legislation applies a higher percentage of penalties the bigger the underpaid VAT, even where an unintentional error has occurred.

Since 2002, commonly owned taxpayers or companies within a corporate group have been allowed to use the “no loss of Revenue” argument to avoid penalties in situations of underpaid VAT e,. where one company did not correctly charge VAT on supplies of goods or services to another company, an argument can be put forward to say that where VAT had been correctly charged by the first company, it would have been fully recovered by second company and therefore there is an overall “no loss of Revenue” in terms of VAT.

In cases where the companies are not commonly owned, Revenue can impose reduced penalties maxed to €60,000 or three per cent of the underpaid VAT, whichever is the lesser, on the basis that Revenue argue there is an “erosion of the tax system”. Revenue havsnot provided for these situations in favour of the tax payer in the new legislation. Therefore, higher statutory penalties can be applied under law. This is very disappointing.

A range of penalties from €950 to €1,520 for other errors has recently been increased to €4,000 each. Such penalties can be imposed for the issue of an incorrect invoice, the filing of an incomplete or incorrect VAT return, the failure to VAT register on time, the charging of VAT when not registered for VAT and the use of an incorrect VAT number etc.

On a positive note, there is a reduction of penalties under VAT law for the first time since 1972. A taxpayer who writes voluntarily to Revenue in relation to underpaid VAT can receive maximum reduced penalties on each submission as long as they are five years apart. This is different to the old system where a taxpayer only had two life-time chances to receive maximum penalty reduction. Any voluntary written submissions made during each five year period under the new system will receive a partial reduction in penalties.

It should be noted that all of the above changes apply to Revenue audits. Revenue audits include both location and desk Audits. Location audits are easily identified as the taxpayer will normally receive a notice of a visit to the business premises where the Inspector of Taxes will review the relevant books and records of the business. This type of audit should have a formal opening and closing meeting with Revenue together with question and answer sessions as appropriate during the Audit. A desk Audit is harder to identify. It normally involves Revenue making a written request for documentation to back up a recent reclaim or submission. However, even less formal Revenue queries over the telephone regarding perhaps changes to the normal entries of a VAT return or background questions to a recent transaction can constitute a Revenue Audit. A taxpayer should be able to identify these scenarios in case a written disclosure should be submitted in order to minimise penalties.

Dorothy Gallagher is VAT consultant in KPMG Galway and has extensive experience in all areas of VAT, including Revenue audits, cross border matters and property VAT.

Dorothy can be contacted by email on [email protected] or by telephone

on 091 534600.

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