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Please note: VAT Misdeclaration Penalty has been replaced by the Schedule 24 inaccuracy penalty for all accounting periods where the return period commences on or after 01/04/2008 and the due date is on or after 01/04/2009. Misdeclaration penalty will still apply where the due date is before 01/04/2009.

Please see the Compliance Handbook CH80000 Penalties for Inaccuracies for further details.

The following questions should be addressed when considering reasonable excuse

• Has the trader shown ignorance or misunderstanding of primary or secondary legislation? Ignorance or misunderstanding of secondary legislation may, in certain circumstances, be considered to constitute a reasonable excuse.

Although there is no definitive answer to what is considered “primary� and what is considered to be “secondary� legislation, a distinction was drawn in the case of Jo Ann Neal (LON/86/222), an appeal against a Belated Notification Penalty.

The appellant was a fashion model with no experience of VAT. The nature of her work meant that she did not know whether, or if so, when, her turnover would amount to a particular figure. The tribunal held that her ignorance did not provide her with a reasonable excuse. Miss Neal appealed to the High Court, which upheld the earlier decision.

However, the judge made a distinction between “basic ignorance of the primary law governing VAT and on the other hand ignorance of aspects of law which less directly impinge upon such liability.� This has been regarded as authority for the proposition that ignorance of other than basic law can be a reasonable excuse. The decision has therefore been much cited in subsequent appeals.

• Is the transaction outside of the “normâ€� for the trader? Where any transaction has taken place which is outside the “normâ€� and where this transaction is in an area which can be considered to add complications to a trader’s normal accounting procedure, this may in some cases provide a trader with a reasonable excuse against the imposition of a misdeclaration penalty (MP).
• Does the trader run a small business or is it a large complex business?
• Taking into account the size, structure and type of transaction, can it be established that the trader had a genuine belief that he was entitled to do what he had done? Was it reasonable for him to hold such a belief? If so, a reasonable excuse may exist.
• Did the trader seek advice?