HMRC’s new penalty regime has always sat uncomfortably with the Do It Yourself Housebuilder Scheme. Claimants who make incorrect claims not only face unexpected VAT costs but the threat of a penalty to boot. This has always seemed unfair and illogical. Claimants are often unfamiliar with VAT and are dealing with one of the most complicated and difficult areas of VAT, relying on guidance from HMRC that is not always clear, and therefore it is not surprising that errors are made. The penalty regime is also designed to encourage future compliance, which is of little relevance to DIY claims as most claimants will never make another claim.
It seems that the Tribunal thinks that HMRC’s approach is sometimes illogical too. In two cases, C J Palau & R C Loughran v HMRC  UKFTT 0038 (TC), and Mrs M M Howells & Mr D A Howells v HMRC  UKFTT 0412 (TC), penalties were set aside where it was clear that the claimants had submitted accurate claim forms but for various reasons the claim was ineligible.
In cases where the claim form has been completed honestly and to the best of the claimant’s knowledge and ability penalties should not be charged if the claim proves to be ineligible. Appeals should be lodged in cases where penalties have been imposed unreasonably.