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HMRC internal manual

VAT Civil Penalties

Misdeclaration penalty: Discretion, reasonable excuse, and mitigation: Proportionality

Please note: VAT Misdeclaration Penalty has been replaced by the Schedule 24 inaccuracy penalty for all accounting periods where the return period commences on or after 01/04/2008 and the due date is on or after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

Claims that the size of the penalty is ultra vires (beyond the power of) the EC Sixth Directive, or that the penalty is disproportionate to the error are not reasonable excuses; these are questions of law.

If the criteria of the VAT Act 1994 Section 63(1) or 64(1) are met then the misdeclaration penalty (MP) applies unless the trader can demonstrate a reasonable excuse for the misdeclaration, or has made a voluntary disclosure.

Our interpretation has been tested at tribunal in the case of W.Emmett and Son - LON 90/1316Z when his Honour Judge Medd OBE found in HMRC’s favour.

As part of the grounds of appeal at Tribunal, the business claimed that the misdeclaration penalty was disproportionate to the offence and offended against the EC law of “proportionality”.

According to this principle a Public Authority may not impose obligations on a citizen except to the extent to which they are strictly necessary in the public interest to obtain the purpose of the measure.

If it is out of proportion, then, in accordance with the 6th Directive the measure will be annulled.

The trader’s representative was unable to point to any provision of the 6th Directive which had not been implemented by the Government of the UK.

The Tribunal Chairman stated that there being no doctrine of proportionality in UK law, then the penalties imposed by Parliament could only be struck down if they infringed a clear principle of European law which is binding on the government of this country.

As a general rule Community law relies on the enforcement procedures of member states to ensure the provisions of a directive are obeyed. To interfere with that discretion beyond the limits imposed by UK law would be an abuse of the judge’s supervisory jurisdiction. To answer the question as to whether the penalty imposed was strictly necessary would need an inquiry beyond the scope of the Tribunal into matters which were essentially of an administrative nature.

MP is to be maintained where proportionality is the sole argument against imposition.