What is Reasonable (and What Isn’t)

Posted: 10th May 2011

Avoiding penalties for under-declarations of output VAT is a tricky business, even when the mistakes are innocently made. The VAT legislation allows penalties to be forgiven when there is a ‘reasonable excuse’, but HM Revenue and Customs (HMRC) are well-known for their singular view of what is and what is not ‘reasonable’.

On the plus side, this means that there is a regular flow of cases testing the boundaries of reasonableness.
Two recent cases illustrate the point. The first involved a private members’ club that had received supplies of water from a VAT-registered supplier. HMRC had told the club that VAT-registered businesses are generally required to chargeVAT on their supplies. Theclub made attempts to find out if the water it purchased carried VAT and was told by another water supplier that VAT was charged on such supplies.
The club incorrectly reclaimed VAT on bills totalling more than £200,000. HMRC subsequently levied a surcharge of more than £4,000 for the error.
The club appealed against the decision – and won. It had made a reasonable effort to ascertain the correct VAT position and had made an honest mistake in completing the return.
In the second case, a supplier of food products took on a temporary employee in an accounting capacity while the accounts administrator was on holiday. A batch of zero-rated purchase invoices was wrongly coded as being VAT-inclusive. In addition, some sales invoices were miscoded into the subsequent VAT period.
HMRC levied a misdeclaration penalty and this was upheld by the Tribunal.
This may seem harsh, but HMRC would clearly be in a difficult position if merely having incompetent or improperly trained staff proved to be a sufficient excuse for failing to pay VAT due.