Tx notes fa22 Final

June 2023 to March 2024 exams
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8.3. Submission of an incorrect return leading to: 
๏
an understatement of VAT liability
๏
a failure of inflated claim for repayment of tax
The amount of penalty is based on the amount of tax understated, but the actual penalty is linked to 
the taxpayer behaviour, as follows:
(a)
there will be no penalty where a taxpayer simply makes a mistake.
(b)
there will be a moderate penalty (up to 30% of the understated tax) where a tax payer fails to 
take reasonable care.
(c)
there will be a higher penalty (up to 70% of the understated tax) if the error is deliberate.
(d)
there will be an even higher penalty (up to 100% of the understated tax) where there is also 
concealment of the error.
A penalty will be substantially reduced where the taxpayer makes disclosure, especially unprompted 
disclosure to HMRC.
See “Standard Penalties for Errors” in Rates and Allowances information provided in the exam
 
Example 7 
Blanche Ltd has made an error relating to understated output VAT of £8,500 on the VAT return, for 
quarter to 31 December 2022.
Blanche Ltd has turnover for the quarter of £700,000.
How should this error be disclosed to HMRC and what penalties and interest will be charged 
by HMRC? 

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June 2023 to March 2024 exams
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9. The Cash Accounting and Annual Accounting Schemes 
(a)
The cash accounting and annual accounting schemes are both available to small businesses.
(b)
The cash accounting scheme enables a trader to account for output VAT on a cash basis. The 
scheme will normally be beneficial where an extended period of credit is taken by customers, 
and it also results in automatic bad debt relief. The disadvantage is that input VAT will only be 
recovered in relation to when payments are made.