Farmer wins appeal as judge overturns £43k penalty over obscure VAT reform

HMRC has come under sharp criticism after a tribunal ruled that a “very significant” VAT rule change was effectively “hidden away”, overturning a £43,438 penalty imposed on a small island farm.

The first-tier tribunal found it was “entirely reasonable” that Andrew Julian, who runs the 35-acre Julian Partnership on St Martin’s in the Isles of Scilly, was unaware his business needed to register for VAT following reforms to the Agricultural Flat Rate Scheme (AFRS).

The changes, announced in the 2020 Spring Budget and introduced in January 2021, excluded farms with taxable supplies exceeding £230,000 from the scheme. Businesses crossing that threshold were required to notify HMRC and register for VAT.

The AFRS is widely used by smaller farming enterprises to reduce administrative burdens, allowing them to apply a 4% flat rate to sales instead of entering the full VAT system.

Mr Julian’s business exceeded the revised limit but failed to notify HMRC. The oversight was uncovered in April 2023, two years after the rule change took effect.

Once alerted, the Julian Partnership registered and paid more than £500,000 in VAT within 12 months.

Despite that payment, HMRC imposed a £43,438 penalty for late registration — a substantial sum for a 35-acre mixed enterprise growing flowers year-round, running two holiday cottages and keeping a small herd of beef cattle.

The tribunal was asked to consider whether ignorance of the legislative change could amount to a “reasonable excuse”. Such arguments are rarely accepted in tax disputes.

In its ruling, the judge described the AFRS amendment as a “very significant” reform that had been “hidden away in a document aimed at specialists involved in tax policy”.

There had been little publicity surrounding the change, the tribunal found, and the Julians were farmers with no specialist tax expertise.

Given those circumstances, it was “entirely reasonable” that an ordinary taxpayer would not have been aware of the new requirement, the judge concluded.

On that basis, the penalty was quashed.

Emma Beechey, of accountancy firm Moore Kingston Smith, said the £43,000 fine would have placed a serious financial burden on a small agricultural business.

She argued HMRC had taken too narrow a view of what qualifies as a reasonable excuse. Guidance typically focuses on unforeseen events, she said, but failed in this case to recognise that the rule change was not easily accessible to the taxpayer — or even to a generalist accountant.

An HMRC spokesperson said the department noted the tribunal’s decision and was considering its next steps. It remains unclear whether an appeal will follow.

The ruling is likely to intensify debate over how clearly tax changes are communicated to small businesses, particularly in sectors such as agriculture where specialist advice is not always readily available.