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HMRC internal manual

VAT Civil Penalties

HM Revenue & Customs
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Misdeclaration penalty: Discretion, reasonable excuse, and mitigation: Ignorance of the law

Please note: VAT Misdeclaration Penalty has been replaced by the Schedule 24 inaccuracy penalty for all accounting periods where the return period commences on or after 01/04/2008 and the due date is on or after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 following questions should be addressed when considering reasonable excuse

  • Has the trader shown ignorance or misunderstanding of primary or secondary legislation? Ignorance or misunderstanding of secondary legislation may, in certain circumstances, be considered to constitute a reasonable excuse.

Although there is no definitive answer to what is considered “primary” and what is considered to be “secondary” legislation, a distinction was drawn in the case of Jo Ann Neal (LON/86/222), an appeal against a Belated Notification Penalty.

The appellant was a fashion model with no experience of VAT. The nature of her work meant that she did not know whether, or if so, when, her turnover would amount to a particular figure. The tribunal held that her ignorance did not provide her with a reasonable excuse. Miss Neal appealed to the High Court, which upheld the earlier decision.

However, the judge made a distinction between “basic ignorance of the primary law governing VAT and on the other hand ignorance of aspects of law which less directly impinge upon such liability.” This has been regarded as authority for the proposition that ignorance of other than basic law can be a reasonable excuse. The decision has therefore been much cited in subsequent appeals.

  • Is the transaction outside of the “norm” for the trader? Where any transaction has taken place which is outside the “norm” and where this transaction is in an area which can be considered to add complications to a trader’s normal accounting procedure, this may in some cases provide a trader with a reasonable excuse against the imposition of a misdeclaration penalty (MP).
  • Does the trader run a small business or is it a large complex business?
  • Taking into account the size, structure and type of transaction, can it be established that the trader had a genuine belief that he was entitled to do what he had done? Was it reasonable for him to hold such a belief? If so, a reasonable excuse may exist.
  • Did the trader seek advice?