In Udlaw Limited v HMRC [2020] TC07548, the First Tier Tribunal (FTT) found that a VAT penalty for ‘careless’ inaccuracies was not ‘careless’.

  • The appellant supplied Furnished Holiday Lettings of mobile homes at a holiday park and retained 20% of sales paid as commission to an agency, resulting in an understated output tax liability of £24,933.
  • The appellant hired a bookkeeper and external accountants to assist and audit the business’s financial operations.
  • HRMC queried why the applicant had not noticed differences between the VAT account sales and the audited annual accounts sales. HMRC assessed a Penalty for Error of 15% of the understated amount on the basis of the inaccuracy of returns and failing to take reasonable care.
  • The appellant argued reasonable excuse for the errors including her mother’s death, her father’s failing health and death, and her brother's stroke in the period in question. This had made her rely heavily on accountants and the bookkeepers employed to handle VAT and accounting issues.
  • The appellant appealed to the FTT.

The FTT concluded that the appellant had taken reasonable care in completing her returns in the light of her special circumstances. The appeal was allowed.

Comment

Penalties may be charged on inaccurate returns that are either as a result of not taking reasonable care or deliberate carelessness. Should these factors result in an understatement of tax, a false or inflated statement of a loss or a false or inflated claim to repayment of tax penalties can be applied.

Whilst a penalty cannot be dismissed simply because it is harsh, taxpayers should resist penalties if there is no evidence of not taking reasonable or deliberate care. Appeals for penalties are done within 30 days of the date on the notice of penalty assessment.

Links

VAT: how to reconcile your turnover to your returns
An example of how the reconcilation works in practice

How to appeal an HMRC decision
What type of decision is appealable? What are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Penalties for Error and Mistake
What penalties apply if you make an error or mistake? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?

Furnished Holiday Letting 
Furnished holiday letting (FHL) is an activity which has for many years been subject to a favourable set of tax rules: it has been treated, by default, as trading for Income Tax purposes.

External links

Udlaw Limited v HMRC [2020] TC07548

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