There have been several tribunal cases involving penalties for inaccurate VAT returns that have clarified how the penalty regime should operate. The following paragraphs provide examples.
Athenaeum Club  UKFTT 583 (TC), TC00833 – input tax dilemma
Have you ever looked at a purchase invoice or bill and not been totally sure whether it includes VAT or not? This was the problem for the treasurer of the Athenaeum Club in relation to a £216,871 water bill for its commercial premises, and she couldn't establish whether it included VAT or otherwise. She liaised with two officers of HMRC, one of whom had carried out a recent VAT visit, and she was also reassured by correspondence she saw from Anglia Water indicating that VAT was due on water charges for commercial properties. She therefore claimed input tax of £28,287 based on a VAT rate of 15% that applied at the time of the bill (VAT fraction 3/23).
It was subsequently found that the water bill did not include VAT so HMRC, on reviewing the return submitted by the taxpayer, reduced the input tax. It also assessed a 15% careless error penalty, the minimum penalty that can be applied if an error is 'prompted', ie discovered by HMRC rather than notified by the taxpayer.
However, fair play and common sense prevailed and the tribunal reversed the penalty. To quote directly from the case report:
“Mrs Jones had been misled by the letters from Anglia Water