In Laurence Donnelly v HMRC [2019] UKFTT 655 (TC), the FTT has held that no inaccuracy penalties were due for over-claimed input VAT as there had been no supply and therefore the over-declaration of output VAT meant that the potential lost revenue was nil.


Korum Wholesale Trading Ltd (Korum), of which Mr Donnelly was the only director, purportedly resold goods. HMRC began to investigate Korum’s activities and concluded the supply to Korum was connected to a fraudulent evasion of VAT by Korum’s supplier, and that Korum, in the person of Mr Donnelly, knew of that connection. As a result, it decided that Korum was not entitled to input tax credit in respect of the input VAT on certain invoices issued by Beehive Wine Stores on the basis of the decision of the Court of Justice of the European Union in Kittel v Belgian State C-440/04.

HMRC then concluded that the consequent inaccuracy in the VAT returns (the claim for input tax under the invoices from Beehive Wine Stores) was deliberate and had been concealed. As a result, HMRC imposed a penalty on the company under Schedule 24, Finance Act 2007, of 95% of the amount of the input tax claimed.

HMRC also decided that the deliberate inaccuracy was attributable to Mr Donnelly and notified him under paragraph 19, Schedule 24, Finance Act 2007, that he was liable to pay 100% of the penalty. Mr Donnelly appealed the notice.

FTT decision

The appeal was allowed.

The FTT acknowledged the fraud and accepted that Mr Donnelly had known about it, but concluded that HMRC had not proved that the alleged transactions had occurred. As a result, if there was no supply, there was no potential lost revenue and the maximum amount of the penalty was therefore nil.

The FTT considered the proper construction of “deliberate” in paragraph 4(2), Schedule 24,

Finance Act 2007. It echoed the view expressed by the Court of Appeal in Tooth v HMRC [2019] EWCA Civ 826, that where a person has submitted a tax return which he knows contains an inaccuracy, the return can be said to contain a deliberate inaccuracy even though the taxpayer did not intend to bring about an insufficiency of tax.

In reaching its conclusion, the FTT also considered the proper construction of “attributable” in paragraph 19(1) Schedule 24, Finance Act 2007. In the FTT’s view, in the absence of a statutory definition, “attributable” should bear its ordinary meaning. Attributable means having responsibility for something else and, in the context of the attribution of a deliberate inaccuracy, carries with it a sense that the person to whom the action is attributed is in some way blameworthy. Where a person does something which causes an inaccuracy and causes it to be deliberate there is no doubt that the deliberate inaccuracy is attributable to him. Where he fails to do something, which permits the deliberate inaccuracy, or does or fails to do something which permits it, the position is more nuanced and in the FTT’s view it is generally only where he knew or had a duty to know whether his action or inaction permitted the inaccuracy that, as a matter of ordinary understanding, one would say that the inaccuracy was attributable to him.


The FTT in this case adopted the Court of Appeal’s analysis of “deliberate” in Tooth, in contrast to the position adopted by the FTT in Leach v HMRC [2019] UKFTT 352 (TC), where the FTT felt the Tooth analysis of “deliberate” was too wide when considering the imposition of penalties. In Leach, the FTT preferred the traditional approach to behaviour-based penalties which requires that the taxpayer must have knowingly provided to HMRC a document that contains an error with the intention that HMRC should rely upon that inaccurate document.

The decision can be viewed here.