VAT Penalty on Incorporation?

Contact: Burgis & Bullock (Warwickshire, England)

Have you recently changed legal entity, for example by incorporating a sole proprietorship or partnership ? Or has a sole proprietor taken someone into partnership?

 If you have, be sure to advise H M Revenue & Customs (HMRC) within 30 days of the change!

Why? Because if you don't there is a growing likelihood that HMRC will seek to charge a "Belated Notification" penalty which is calculated on the amount of VAT due or potentially due on your VAT returns up until the point that the change is notified.

But, I hear you ask, if the new entity continues to use the VAT number of the sole proprietor or partnership (which is usual) and continues to submit VAT returns and pay any VAT that is due, surely this is simply an administrative oversight? And  surely a penalty will not apply?

Well, according to HMRC, it will!

There is currently a case going through the Tax Tribunal where HMRC originally imposed a penalty of over £40,000 on a business who belatedly notified such a change. Even though there was and is no tax loss. And we are dealing with just such a case at the moment- and we are aware of others!

We are not sure if this represents an internal policy change within HMRC but it does seem that they are actively seeking to impose penalties in this way. For basic "housekeeping" errors!

So beware! And if you've changed legal entity in the recent past, contact us urgently to review how the VAT notifications have been made and avoid a potentially crippling penalty!