Misdeclaration penalty

By Tolley

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Misdeclaration penalty
  • Avoiding a penalty
  • Conditions
  • Objective tests
  • Business discovers the error
  • Reasonable excuse
  • Mitigation
  • Appeals

This guidance note provides an overview of the misdeclaration and repeated misdeclaration penalty. Please note that these penalties were replaced with effect from 1 April 2008 for VAT return periods commencing from 1 April 2009. Please see the Overview of the three penalties introduced from 1 April 2010 and Penalties - summary of penalties that can be applied guidance notes for information on the current penalty regime.

VATA 1994, ss 63-64, 70-71; Notice 700/42 

The following penalties can be imposed in respect of VAT return periods starting before 1 April 2009:

  • misdeclaration penalty - covers single large misdeclarations
  • repeated misdeclaration penalty - this penalty covers large and repeated misdeclarations

A business cannot be liable to both types of penalty at the same time. If the business meets both tests, HMRC will only apply the misdeclaration penalty.

Avoiding a penalty

HMRC will not issue a penalty if:

  • the business provides evidence that it has a reasonable excuse for making the misdeclaration
  • the business discovers that it has made a misdeclaration and notifies HMRC voluntarily about the error
  • HMRC discovers the misdeclaration on the most recent VAT return on or before the due date for the next VAT return. This is called a period of grace relaxation (see below)
  • the under-declaration is matched by a corresponding over-declaration of the same amount so no actual tax is due to / from HMRC
  • for a misdeclaration penalty the actual penalty would be less than £300 or for a repeated misdeclaration penalty the total penalty would be less than £30. However, it should be noted that if the penalty is mitigated to an

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