In M J Hickey Plant Hire and Contracts Ltd v HMRC1 , the Upper Tribunal (UT) allowed the taxpayer’s appeal and in a carefully considered judgment set out the correct approach to the penalty rules applicable to ‘normal’ and ‘delayed tax’ cases, contained in Schedule 24, Finance Act 2007 (FA 2007).


The taxpayer used software to keep its records and prepare its quarterly VAT returns. It decided to adopt a ‘default’ setting in relation to the return dates which stopped the period one day short of the required period and put that day at the beginning of the next period. The result was that tax which should have been declared for that last day was declared as part of the return for the next period. This was intended to help the taxpayer’s cash-flow. This shifting occurred in respect of 15 returns (from 1 December 2009 to 31 August 2013). Nine produced an underpayment of VAT and the remainder an overpayment.

On discovering what had happened, HMRC required the then current period to be dealt with properly and raised a separate assessment for the last day of the previous period (31 August 2013) which would otherwise not have fallen within any return. HMRC also issued a penalty in the final sum of £149,186.

HMRC imposed penalties under paragraph 5, Schedule 24, FA 2007 and took, as a base for the penalty, the tax that was under-declared for each period for which there had been an underdeclaration and then aggregated those under-payments. This was done on a quarter by quarter basis, ignoring the fact that the tax under-declared in one period was declared in a return (and in substance accounted for and paid) in the next period.

The taxpayer disputed the method of calculation of the penalty and therefore the amount. In its view, the penalty should have been imposed under paragraph 8, Schedule 24, FA 2007, to reflect the fact that the tax was delayed but not avoided.

The point in issue was therefore whether the penalty should be assessed under paragraph 5 (standard penalty) or paragraph 8 (delayed tax).

The taxpayer appealed the penalty assessment to the First-tier Tribunal (FTT), which dismissed its appeal. It then appealed to the UT.

The legislation

Paragraphs 5 and 8, Schedule 24, FA 2007, provide as follows:

“Potential lost revenue: normal rule

5 (1) ‘The potential lost revenue’ in respect of an inaccuracy in a document [(including an inaccuracy attributable to a supply of false information or withholding of information)] or a failure to notify an under-assessment is the additional amount due or payable in respect of tax as a result of correcting the inaccuracy or assessment … 

Potential lost revenue: delayed tax

8 (1) Where an inaccuracy resulted in an amount of tax being declared later than it should have been (‘the delayed tax’), the potential lost revenue is –

(a) 5% of the delayed tax for each year of the delay, or

(b) a percentage of the delayed tax, for each separate period of delay of less than a year, equating to 5% per year …”

UT decision

The taxpayer’s appeal was allowed.

HMRC argued that paragraph 5 referred to an ‘inaccuracy’ in a ‘document’, which meant that every inaccuracy in each separate return had to be considered in isolation. The correcting of the position in the next return was itself an ‘inaccuracy’ in that ‘document’, however, the fact that it was in a sense correcting the position was irrelevant for the purpose of assessing the level of penalties under paragraph 5.

In support of this argument, HMRC referred to various HMRC guidance and practice statements which supported its approach.

The taxpayer argued that the correct approach was that set out in paragraph 8, on the basis that there was one inaccuracy in each quarter, which owing to the nature of the inaccuracy was split over two returns.

The UT accepted the taxpayer’s arguments. It did not agree with HMRC that penalties had to be applied on a strict return by return basis without reference to the surrounding circumstances.

While it was true that a strict reading of paragraph 5, in isolation, would tend toward HMRC’s interpretation, paragraph 8 existed as an alternative to paragraph 5 in circumstances where the facts made that paragraph relevant.

In the view of the UT, because there was a causal link between the errors between two returns which led to an under-declaration in one and declaration of the missing amount in the next, paragraph 8 was relevant.


Two important points arise from this case. The first is that the penalty regime operates in a way which is designed to fit the penalty to the factual and causative nature of events rather than the other way around. The causal connection in the error was critical to the application of paragraph 8 and the UT distinguished the case of Miah v HMRC2 , where no such causal link was present.

The second is a general reminder that HMRC’s guidance and practice notes do not have the force of law. In this case, both before the FTT and the UT, HMRC attempted to use such internal documentation in support of its interpretation of the law. The circularity of such an argument is obvious and perhaps not surprisingly this argument was given short shrift by the UT.

A copy of the decision can be found here.