VAT penalty set aside

In C J Palau & R C Loughran v CRC (2014) TC 04251, the FTT allowed a taxpayer’s appeal against a penalty under Schedule 24 FA 2007 for an error in a document. The taxpayer had used the wrong form and there was no loss of tax.

  • The appellants reclaimed VAT following a flat conversion under the DIY Housebuilders Scheme, they had read about the form in a newsletter.
  • They stated in response to a question on the form that they had the intention of selling the properties once completed. As a result of their answer they were ineligible for the DIY VAT scheme.
  • Accordingly HMRC denied the refund due to ineligibility.

HMRC  then imposed a fine of £1,408 being 15% of the potential lost revenue arguing that the taxpayer had made a false or inflated claim for repayment of tax as a result of carelessness.


  • Learning that they had used the wrong form the appellants engaged an accountant who registered them for VAT and submitted a return to recover their input VAT.
  • This amount exceeded the amount that would have been received under the DIY scheme had they been eligible.
  • The appellants argued that there was no potential lost revenue, as they had correctly filled out the form showing the intention to sell the property, and so HMRC would never have accepted the claim.
  • They also pointed to the fact that upon VAT registration they had recovered more than what HMRC attested the potential lost revenue was.


The tribunal agreed with the appellants and set the penalty aside. It commented that:

  • It is clear to this tribunal that the form has done nothing more than to serve the purpose for which it was designed. It had on scrutiny by HMRC identified the Appellant’s claim as one which did not meet the conditions of the Scheme.
  • The Respondents’ argument produces the logical absurdity that the Appellants accuracy in the completion of a form designed to check eligibility under the Scheme gives rise to a penalty for inaccuracy.


Its a bit of a shocker that HMRC would attempt to raise a penalty under sch 24 FA 2007 for the use of the wrong form. However, now we have a case to quote in case it should happen again.


C J Palau & R C Loughran v CRC (2014) TC 04251