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Inaccuracy Penalty – a ‘logical absurdity’?

Posted by Julie Green on 03-Jul-2015 10:17:00

It’s well known that HMRC can impose penalties on taxpayers who provide incorrect information. However, in the recent case of C J Palau & R C Loughran v HMRC [2015] UKFTT 0038, the First Tier Tribunal (FTT) concluded that HMRC’s heavy handed approach of imposing a penalty for filing the wrong form was a step too far.  

The two taxpayers owned a property that they planned to convert into flats, which they would then sell. They contacted the HMRC helpline, stating they wished to apply for the DIY Housebuilders’ Scheme following which an application form and accompanying notes were sent to them for completion.  

The forms were duly completed and returned but HMRC correctly rejected the claim on the basis that it was a ‘business’ project whereas the scheme is intended to only repay VAT to private individuals carrying out either a new build or residential conversion of a non-residential property in which they or a member of their family intend to live.

The taxpayers should have recovered VAT by registering for VAT and claiming input tax (the conversion of non-residential property into dwellings and the sale of those dwellings on either a freehold basis or with a lease of more than 21 years (20 in Scotland) is zero-rated).

However, there was no loss of revenue for HMRC because had they registered for VAT the scope for reclaiming input tax is actually greater than with the DIY Scheme. This is because it is possible to claim input tax on professional fees which is not allowed through the DIY scheme.  

Despite this, HMRC also imposed a penalty under FA 2007, schedule 24 para 1(1) to the value of £1,408.49 for supplying a document that contains an inaccuracy.

The taxpayers appealed. They agreed they were wrong to have applied for the DIY scheme but the key point was that on the claim form they gave completely honest replies to all of the questions including ‘are you intending to live in the property you are claiming for? They answered ‘no’, and added, ‘for re-selling purposes’. There was no attempt to mislead HMRC.

The First-tier Tribunal noted that a fine is payable only if a document “contains an inaccuracy which amounts to or leads to a… false or inflated claim to repayment of tax”. The FTT concluded the form had “done nothing more than to serve the purpose for which it was designed”. Only a failure by the taxpayers to include all relevant information would have amounted to inaccuracy and fallen within the scope of the penalty rules.

The judge said the tax authority’s argument led to the “logical absurdity that the appellants’ accuracy in the completion of a form designed to check eligibility under the scheme gives rise to a penalty for inaccuracy.”

CCH therefore advises taxpayers and their advisors to fully disclose all information in relation to their building developments when submitting claims under the DIY Scheme.

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