Half of all penalties for late VAT fining are charged incorrectly.
This is according to new research from UHY Hacker Young, which found that of the 17,200 automatic penalties levied by HMRC for late VAT return filing in 2013, 49 per cent were eventually overturned on review.
The total proportion of fines levied incorrectly could be much higher, as taxpayers must request a review in order for their penalty to be overturned.
UHY Hacker Young partner Simon Newark said: “HMRC’s late filing system starts off with the premise that the taxpayer is wrong – you then have to prove your innocence.
“In a lot of borderline review cases, where we feel the taxpayer should be given the benefit of the doubt, HMRC is now rubber-stamping the penalty.”
Mr Newark continued: “There is a breakdown of trust in the system, as businesses see the review process as HMRC ‘nodding through’ its own poor decisions in the hope the business will back down.”
According to UHY Hacker Young, HMRC’s systems are designed to automatically impose a fine for late payment, regardless of circumstances.
But the research suggests that businesses are less willing to challenge penalties. There were some 19,400 requests to review VAT decisions during 2013 – a 22 per cent drop from the previous year, and a 48 per cent drop from 2011.
Mr Newark added: “As the review system moves further away from its original aim of being a detailed and objective examination of potential errors, a greater number of businesses are finding that time spent battling with the tax authority over its mistakes is simply wasted.
“HMRC has a patchy record at tax tribunals, and is often rebuked by judges for its procedures and decision-making processes. Unfortunately, the cost of taking HMRC to a tribunal doesn’t make economic sense for a lot of businesses, and many poor or incorrect VAT decisions are left to stand for that very reason.”