The Forum of Private Business has issued the alert after a report that one firm is facing a £10,000 fine for not informing inspectors it had changed its name.
The firm, which did not want to be identified but which has an exemplary record of VAT payments and submitting tax returns on time, was originally hit with a fine of over £30,000 under VAT notification liabilities contained in the Finance Act 1985 and later the VAT Act 1994.
The fine was imposed after the business changed from a partnership to a limited company adding a ltd' to its name without informing HMRC, despite it retaining the same VAT number and regardless of the fact the Revenue did not lose out on tax payments.
The fine has since been reduced to just over £10,000 after intervention from accountants and the Forum and attempts are being made toreduce the penalty further.
The Forum's Tax Adviser Andrew Needham said: "I am concerned that this is a change in HMRC's long-standing policy of waiving its technical ability to impose this penalty fine in such circumstances.
"If this is carried through and sets a precedent it could result in huge fines being imposed on small businesses which, in reality, have done very little wrong.
"It is important that all small businesses are aware they could face steep fines unless HMRC is kept fully updated but this heavy-handed approach is the very opposite of the support that is desperately needed at this difficult time and HMRC risks further alienating firms hit by its disproportionate, targeted business records checks regime and widely-reported poor levels of service."
Mr Needham pointed to a House of Commons debate in July 1986 on the legal clause to protect small traders making innocent mistakes from recently-introduced fixed VAT penalties, a clause which was subsequently included in the legislation.
The then future Prime Minister, Tony Blair, said: "Nobody is suggesting that there should not be compliance with VAT regulations - of course there should be. The situations with which we are dealing are those in which there has been an innocent non-compliance. It should always be borne in mind that the power of mitigation depends precisely on the VAT tribunal commissioners thinking it right to exercise it.
"An injustice exists now and we have been provided with an opportunity to remedy it....If we really care about small businesses and if what we are saying is not mere rhetoric but has a touch of reality about it, those who go through the Lobby and vote for the new clause will be pinning their colours to the mast of small businesses, while those who do not will forfeit their right to be called the friends of small businesses."
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Susie Hughes © Shout99 2012