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HMRC internal manual

VAT Civil Penalties

Misdeclaration penalty: Discretion, reasonable excuse, and mitigation: No overall tax loss

Please note: VAT Misdeclaration Penalty has been replaced by the Schedule 24 inaccuracy penalty for all accounting periods where the return period commences on or after 01/04/2008 and the due date is on or after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 argument of no overall tax loss is frequently put forward as a reasonable excuse based on the definition of the word “lost” in the VAT Act 1994 S63 and 64.There are numerous cases which confirm HMRC’s interpretation that the word “lost” does not necessarily mean permanently lost. For example the Tribunal case of Fritz Bender Metals (UK) (LON/90/1218):

Part of the appellant’s grounds of appeal were that the tax loss to HMRC was only “temporary” and the word “lost” within section 14 (1) of the Finance Act 1985 (now S63(1) of the VAT Act 1994) should be taken to mean “permanently” lost and that tax cannot be permanently “lost” until the chance for its discovery by the trader has passed. Although the Tribunal found a reasonable excuse, the debate on the construction of section 14 was settled in favour of HMRC who had argued that the word “lost” must be taken to mean in the context of the section as a whole, and that the whole section was related to the tax for prescribed accounting periods.

The calculation of tax “lost” looks solely at the situation at the time of making the return and solely at the one individual trader. Consequently claims that one trader’s output tax is another trader’s input tax, do not constitute a reasonable excuse, and are not subject to the nil net tax concession.