Taxpayer’s appeal against HMRC’s VAT misdeclaration penalty allowed

Upper Tier Tax Tribunal allows taxpayer’s further appeal against HMRC’s penalty for misdeclaration in VAT returns on grounds of breach of ECHR.

The case of Dhalomal Kishore v HMRC before the Upper Tax Tribunal concerned the decision of the First Tier Tax Tribunal which upheld penalties for misdeclaration imposed by HMRC under section 63 of the VAT Act 1994.

The taxpayer, Dhalomal Kishore claimed input tax in his quarterly returns for VAT periods 03/06 and 06/06 totalling £22,392,775.10. HMRC denied his claims for input tax on the grounds that there were transactions in the supply chain connected to VAT evasion and Mr Kishore knew or ought to have known the same. Mr Kishore made a Kittel appeal against HMRC’s refusal to allow the input tax. The FTT struck out the appeal because the taxpayer failed to comply with an unless order in the appeal.

The taxpayer made an appeal to the Upper Tax Tribunal on the following grounds:

1. The taxpayer should be given the chance to satisfy HMRC that there was a  reasonable excuse  for the misdeclaration;
2. If the taxpayer was successful on ground 1 then no liability to  a  penalty  accrued  prior  to  the  repeal  of  section  63 on 31  March  2008;
3. HMRC’s  penalty assessment was out of time;
4. HMRC had no right to set­off a repayment made to the taxpayer in  respect  of  input tax  against  the  penalty assessment;
5. The  penalty  violated Article  6  of the European  Convention on Human Rights (ECHR); and 
6. The First Tier Tax Tribunal was wrong to strike out the  penalty appeal. 

The Upper Tax Tribunal dismissed grounds 1 to 4 but allowed the appeal on grounds 5 and 6. The UTT considered the appellant’s contention that he was facing a criminal penalty being but was denied the opportunity to defend it because the question of reasonable excuse is deemed to have been disposed of as a result of the strike out of his Kittel appeal.

The UTT found that the First Tier Tax Tribunal was wrong to strike out the taxpayer’s penalty Kittel appeal due to the fact he ran out of funds in order to obtain proper legal representation.

What is a misdeclaration penalty?

HMRC can issue a misdeclaration penalty or inaccuracy penalty for large errors in VAT returns. HMRC may begin a compliance check or decide they have enough information to impose a penalty for inaccuracies which include an under declaration, an increased repayment or failure to submit a return when HMRC assess the tax due.

The rate of penalty if 15% of the amount of the misdeclaration and this can be reduced upon appeal to HMRC and they decided there are mitigating factors.

HMRC have issued guidance on misdeclaration penalties here.

HMRC’s ability to impose misdeclaration penalty in absence of reasonable excuse

This case shows the Tribunal will not impose a precondition that a taxpayer should have an opportunity to show a reasonable excuse for an error in a VAT return before HMRC can issue a misdeclaration penalty. Whilst a taxpayer can appeal and show a reasonable excuse, liability will accrue from the date of misdeclaration.

Read the full judgment for Dhalomal Kishore v HMRC [2020] UKUT 0233 (TCC).

How do I appeal a misdeclaration penalty?

If a taxpayer disagrees with HMRC, the taxpayer has the following options:

Stage 1: Request a HMRC review: A taxpayer can appeal in writing within 30 days of HMRC’s notice of their decision. HMRC can offer an internal review of the disputed decision (or the taxpayer can request this procedure at any time). The review is an entirely internal procedure completed not by the original HMRC decision maker but by a different HMRC officer.

Stage 2: Appeal to the Tax Tribunal: A taxpayer can appeal to the First Tier Tax Tribunal if the taxpayer cannot agree their position following the review. The independent tribunal will make a determination on the case. A further appeal is permitted if a taxpayer does not agree with the decision. There are strict time limits for appealing to the Tax Tribunal and you should seek legal advice as soon as possible.

How do I appeal a First Tier Tax Tribunal decision?

Any appeals against HMRC’s decisions must first be made to the First Tier Tax Tribunal. Upon receipt of the outcome, if you do not agree with the decision of the First Tier Tax Tribunal, you can appeal to the Upper Tier Tax Tribunal however you must obtain permission from the First Tier Tax Tribunal. If you do not receive permission, you will need to request permission from the Upper Tier Tax Tribunal.

There are strict time limits for submitting an appeal, usually 56 days from the date of the Tribunal decision. If you do not have permission, then you must seek permission within 30 days of the refusal letter.

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