The taxpayers DG and D Lewis t/a Russell Francis Interiors were in the furniture business and also had a small property portfolio. They exchanged contracts for the purchase of a commercial warehouse in May 2009, and were required to pay a deposit of £25,000 plus VAT. They wrongly believed that the date of exchange was the relevant tax point for VAT purposes, and so claimed back all the VAT in their VAT return for quarter ended June 2009.
HMRC amended the VAT return, disallowed the claim and charged a £5,062 penalty, claiming the mistake was Careless. The taxman had allowed the maximum abatement (i.e. reduction) for a Prompted Disclosure.
The Lewis’ appealed that the penalty was too harsh and, that there was no permanent loss of tax.
The First-tier Tribunal decided that the error was Careless. However, the FTT felt there was ‘no real likelihood of a tax loss to HMRC’ as a result of the mistake, and the taxpayers would not have submitted a duplicate claim in the following quarter. Also the transaction was a one-off and unlikely to be repeated. The Tax Tribunal found ‘special circumstances for reducing the penalty’ applied, and reduced the penalty by half.
This case highlights the fact that the taxman sometimes misinterprets the law. HMRC claimed that the “special circumstances” provisions (of FA 2007 Sch 24 para 11) could only apply in “wholly exceptional“ circumstances. The Tax Tribunal said the taxman’s interpretation of the law was wrong. The “special circumstances” rule is there to enable penalties to be reduced where the normal penalty would be unfair. Basically the circumstances have to be special but not extraordinary. The key to winning these cases, of course, is skilled advocacy.
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