HMRC announces 'light touch' approach to VAT rate change

HM Revenue and Customs (HMRC) has said that it will apply a ‘light touch’ if businesses make mistakes on their returns following the forthcoming change in the standard rate of VAT.

The VAT rate will revert from 15 per cent to 17.5 per cent after midnight on 31 December 2009.

The tax authority has said that it has issued its staff with guidance on how to handle the first VAT return following the switch.

This will involve operating a ‘light touch’ for errors that are related to the change in rate.

In practical terms, HMRC said it would not target change-of-rate errors that are unlikely to lead to any material net revenue loss. In other words, should HMRC discover change-over mistakes, it will not seek an adjustment unless there is reason to suppose that there is an overall revenue loss.

HMRC gave the example of a business which supplies standard-rated goods to a fully taxable customer and mistakenly charges 15 per cent instead of 17.5 per cent. The customer should treat only 15 per cent of the tax exclusive (net) price as input tax. If the customer does this there will be no overall loss of tax. When auditing the supplier, HMRC will assume that the purchaser has followed the accounting documents unless there are grounds for thinking otherwise.

In the case of customers who cannot reclaim VAT, and where there is likely to be an overall loss of tax, HMRC said it will look to make an adjustment in the usual way. But it will take into account the difficulties the business has faced in adjusting to the change when considering if any penalties should be charged.