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HMRC internal manual

VAT Civil Penalties

Misdeclaration penalty: Why a penalty arises: What is a misdeclaration penalty

Please note: VAT Misdeclaration Penalty has been replaced by the Schedule 24 inaccuracy penalty for all accounting periods where the return period commences on or after 01/04/2008 and the due date is on or after 01/04/2009. Misdeclaration penalty will still apply where the due date is before 01/04/2009.

Please see the Compliance Handbook CH80000 Penalties for Inaccuracies for further details.

The Finance Act 1985 introduced two new penalties for errors made on VAT returns. These were known as “serious misdeclaration penalty” or “SMP” and “persistent misdeclaration penalty” or “PMP”

  • SMP affected VAT periods starting on or after 1 April 1990
  • PMP affected VAT periods starting on or after 1 July 1988.

These two penalties proved to be insufficiently flexible to deal with the wide range of traders circumstances. This led to a major review in 1993 and after consultation with trade and professional bodies a revised misdeclaration penalty was introduced.

The new name of misdeclaration penalty underlines the extent of the reforms and re-emphasises that the penalty carries no implication of dishonesty.

The reformed procedures apply to all VAT periods starting on or after 1 June 1994.

Penalties issued before this date, continue to be tested against the old criteria but only reductions or withdrawals are notified to the trader by Form VAT 666. No new or increased penalties are issued for periods prior to 1 June 1994.

The purpose of misdeclaration penalty is to encourage traders to submit accurate returns on time.

There is a separate penalty for dishonesty and the penalty rate for that begins at 100%, compared with a rate of 15% for MP, see VCP10300 Civil Evasion.

There are no implications under the Human Rights Act for misdeclaration penalties, see VCP10160.