No: CE 13                                            28 November 1995


                            BUDGET 1995 : VAT

           CLARIFICATION OF THE LAW ON MISDECLARATION PENALTIES


The Chancellor announced that the law on misdeclaration penalties 
will be clarified.  Where a penalty is imposed for a large error in a 
VAT return, the error will also count towards the separate penalty 
which is imposed if there are repeated errors. This will take effect 
from Royal Assent.


NOTES FOR EDITORS

1.     Penalties for misdeclarations on VAT returns were originally 
introduced by the 1988 Finance Act as part of the compliance measures 
recommended by the Keith Committee, which looked at the enforcement 
powers of the revenue departments.

2.     The current penalties were introduced by the 1993 Finance Act. 
These are:

- a penalty for large underdeclarations (the Misdeclaration Penalty). 
  This is triggered by errors on a single VAT return which exceed 
  either 1 million Pounds or 30 per cent of the amount of tax managed 
  (i.e. input tax plus output tax) in the period; and,

- a penalty for repeated errors (Repeated Misdeclaration Penalty) 
  which is triggered by the third misdeclaration in twelve accounting 
  periods - where the errors equal or exceed 500,000 Pounds or 10 per 
  cent of the tax managed in the period. A warning is given after the 
  first misdeclaration.

For both offences the penalty is calculated at 15 per cent of the tax 
underdeclared. However, the same underdeclaration in a given period 
does not attract both penalties. Also, no liability to penalty arises 
if there is a reasonable excuse for the error, and Customs or a VAT 
and Duties Tribunal can mitigate the penalty in appropriate 
circumstances.


3.     It was always the Government's intention that penalties for 
large errors should count towards the tally for the penalty for 
repeated errors, but the wording of the current law means that the 
two penalties may not interact as originally envisaged. So far, no 
repeated error penalty has been triggered by penalties for large 
errors so the law has not been tested, but the Government has moved 
to clarify the law.

4.     The estimated revenue yield from this measure is negligible.

5.     Details for traders are available in Budget notice BN 50/95.




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