How to challenge the taxman(Image: PA)

Did you know over half of the VAT penalties issued by the taxman since April 2009 have been overturned on review or appeal?

HMRC's official records show that out of 28,812 reviewed as late or inaccurate, 16,270 penalties were issued incorrectly. If you receive a penalty for a late or incorrect VAT return, you should exercise your legal right to have that penalty reviewed.

You can also ask for most other penalties and demands that relate to other taxes to be reviewed. The review is carried out by an independent team within the tax office that doesn't include the tax officer who imposed the penalty or raised the tax demand.

In fact, most VAT penalties and penalties charged for submitting tax forms late are imposed automatically by the taxman's computer. In such cases the review will be the first chance a human has to look at the circumstances of the penalty and decide if it was imposed correctly.

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How do you get a review?
The procedure for getting the tax, penalty or demand reviewed varies depending on whether the tax concerned is a 'direct' tax or an 'indirect' tax.

Most of the taxes you have to pay - income tax, capital gains tax, corporation tax, and national insurance contributions - are direct taxes. VAT, and duties levied on 'sins' such as gaming, tobacco and alcohol, are indirect taxes.

Direct taxes
Where the disputed penalty or demand relates to a direct tax, you need to submit an appeal directly to the tax office. Where tax is deemed to be due you will also need to ask for collection of that tax to be postponed while your appeal is considered.

You must ensure that you submit the appeal and postponement application within 30 days of the date of the penalty notice or tax demand. Because of this, you may need to act very quickly if the taxman's letter or notice has been delayed in the post.

When the taxman considers your appeal he may reduce the amount demanded, perhaps to nil. If you are happy with this, you need take no further action. If you are not happy you can ask for a review. Once the review has been completed you have another opportunity to submit a formal appeal against the penalty or tax demand to the Tax Tribunal.

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Indirect taxes
If the penalty relates to VAT or another indirect tax you will be offered a review with the letter that tells you about the penalty. If you don't agree with the penalty you can either accept the offer of a review or submit a formal appeal against the penalty directly to the Tax Tribunal.

The review is the cheaper and easier option. While there are no charges for making an appeal to the tribunal, you will be required to cover the cost of any representatives you choose to call upon, such as an accountant or solicitor.

Whether you opt for a review or a formal appeal, you must act within 30 days of the date of the penalty notice. This is the date stamped on the penalty notice or letter. It is not unusual for a penalty notice to take up to three weeks to reach you through the post, so you may have less than 10 days to either accept the review or submit an appeal to the Tax Tribunal.

Once the tax office has completed the review you will have another chance to submit a formal appeal against the penalty if it has not been removed or reduced to your satisfaction.

Child and working tax credits - can you claim?

What to send in with your appeal or review acceptance
If you had a reasonable excuse for submitting the tax form late (or whatever the cause of the penalty was), explain those circumstances on the review acceptance form, or in a letter with your appeal. You can include evidence to support your position. For example if you relied on advice from the VAT National helpline, send in your record of that advice.

How long does the review take?
The tax office review should take about 45 days, but the review team may ask for longer if the matter is complex. It is in your interest to give the review team as long as they need. If they are time-pressured they may be more likely to uphold the original amount of the penalty or tax demand.

When the review is complete you should receive a conclusion of review letter. If you are not happy with the conclusion, you have 30 days from the date of that letter to submit a formal appeal to the Tax Tribunal. If you do nothing within that 30-day period, the review conclusion will stand.

How to say 'no' to the taxman

Related links
Child and working tax credits - can you claim?
Click here if you need help with your taxes
Get a full tax review for just £60
Small business accounting software
Find out more about tax allowances on Bing