Can I appeal a VAT penalty?

HMRC issues VAT penalties when a business fails to comply with its VAT obligations, such as late submissions, late payments, errors in returns, or under-declared VAT. However, not all penalties are final. If you can demonstrate that the penalty was wrongly applied or that you had a reasonable excuse, you have the right to appeal.

Understanding VAT penalties

VAT penalties are designed to encourage compliance and accuracy. The most common types include:

• Late submission penalties: Issued when a VAT return is filed after the due date.

• Late payment penalties: Applied when VAT owed is not paid on time.

• Inaccuracy penalties: Charged when errors lead to an incorrect VAT return, particularly if HMRC believes they were careless or deliberate.

• Failure to register penalties: Issued if you fail to register for VAT when your turnover exceeds the threshold.

Each penalty type has its own calculation method and time frame, but in all cases, HMRC must inform you in writing and explain how the amount was determined.

When you can appeal a VAT penalty

You can appeal if you believe any of the following applies:

• HMRC made a factual or administrative error in assessing the penalty.

• You had a reasonable excuse for non-compliance.

• The penalty was unfairly high or disproportionate.

• You acted in good faith and took corrective action promptly.

Examples of reasonable excuses include:

• Serious illness or family emergency preventing you from meeting deadlines.

• Technical problems with HMRC’s online systems.

• Unexpected postal delays or system errors.

• Reliance on incorrect professional advice (in some cases).

You cannot usually appeal simply because you disagree with HMRC’s rules or because you forgot to act on time.

How to start an appeal

If you receive a VAT penalty, the first step is to review the notice carefully. It will explain what the penalty is for, how it was calculated, and when payment is due.

You then have three main options:

1. Ask HMRC for a review

You can request an internal review by an HMRC officer not involved in the original decision. This must be done within 30 days of the penalty notice date.

Your request should include:

• The penalty reference number and your VAT registration number.

• The reason you believe the decision is incorrect.

• Any evidence supporting your position, such as medical certificates, correspondence, or proof of system issues.

HMRC will usually reply within 45 days. If they agree with you, the penalty may be reduced or cancelled.

2. Appeal directly to the tax tribunal

If you disagree with the outcome of the HMRC review, you can appeal to the independent First-tier Tax Tribunal. You must do this within 30 days of receiving the review decision.

The tribunal is independent of HMRC and will consider your case based on evidence and legal principles. Most appeals are decided in writing, though some involve short hearings.

3. Request a time-to-pay arrangement

If you agree with the penalty but cannot afford to pay it immediately, you can ask HMRC for a time-to-pay plan. This does not remove the penalty but can help manage cash flow while you settle the debt.

How HMRC assesses “reasonable excuse”

HMRC considers each appeal individually and will assess whether your circumstances genuinely prevented compliance. A reasonable excuse must be something beyond your control that you could not have avoided even by taking reasonable care.

Examples HMRC generally accepts:

• The death or serious illness of a key person in your business.

• Unforeseen breakdowns in accounting or IT systems.

• Fire, flood, or theft affecting business records.

Examples usually not accepted:

• Forgetting to make payment or file a return.

• Cash flow problems caused by poor management.

• Being unaware of deadlines or VAT rules.

The key test is whether a prudent business owner would have been able to avoid the failure in similar circumstances.

Providing evidence to support your appeal

Your appeal is more likely to succeed if you provide strong supporting evidence. This could include:

• Copies of emails or letters showing communication with HMRC.

• Bank statements proving payment attempts or delays.

• Screenshots of system errors or failed submission confirmations.

• Medical or legal documents showing why compliance was impossible.

The more detailed and credible your evidence, the higher your chances of success.

Alternative dispute resolution (ADR)

If you are unable to resolve the issue through standard channels, you can request alternative dispute resolution. ADR involves an independent HMRC facilitator who helps both sides discuss the facts and reach a fair outcome.

ADR is not a replacement for appeals but can be an effective way to avoid a lengthy tribunal process. It is particularly useful when there is a misunderstanding about facts rather than a legal disagreement.

What happens if your appeal succeeds

If HMRC or the tribunal agrees with your appeal, the penalty will be reduced or cancelled. In some cases, interest charged on late VAT payments may also be refunded.

If the appeal fails, you must pay the penalty, but you can still apply for a payment plan or seek advice on avoiding future errors.

Preventing future VAT penalties

To reduce the risk of future penalties:

• File VAT returns and make payments well before deadlines.

• Use digital accounting software that connects with HMRC’s Making Tax Digital system.

• Review VAT records regularly to ensure accuracy.

• Keep documentation for all transactions for at least six years.

• Seek advice from an accountant if you are unsure about VAT compliance.

A proactive approach saves both time and stress and helps avoid repeated penalties.

Example of an appeal in practice

A small business received a £1,200 VAT late payment penalty after missing the due date by four days. The delay occurred because the director was hospitalised unexpectedly. The company provided hospital admission records and bank proof showing the payment was initiated as soon as possible. HMRC accepted this as a reasonable excuse and withdrew the penalty.

This example highlights the importance of providing clear, timely evidence when appealing.

Professional help with VAT appeals

If your case is complex or involves significant sums, it may be worth consulting a tax adviser or accountant who specialises in VAT disputes. They can help you prepare the appeal, gather evidence, and liaise with HMRC on your behalf. Professional representation can also improve your chances of success at tribunal stage.

Conclusion

Yes, you can appeal a VAT penalty if you believe it was issued incorrectly or if you had a valid reason for missing deadlines. The process begins with an internal HMRC review and, if necessary, progresses to an independent tax tribunal.

Success depends on acting quickly, explaining your case clearly, and supporting it with strong evidence. By understanding your rights and maintaining good records, you can challenge unfair penalties and stay in control of your VAT obligations.