A farmer from the Isles of Scilly has successfully overturned a £43,438 tax penalty after a tribunal ruled it was unreasonable to expect him to know about an obscure VAT rule change.
Andrew Julian, who runs the 35-acre Julian Partnership farm on St Martin’s, failed to notify HMRC that his business had become liable for VAT following changes to the Agricultural Flat Rate Scheme (AFRS) introduced in January 2021. The oversight resulted in HMRC issuing a significant financial penalty.
However, a first-tier tribunal has now ruled in Mr Julian’s favour, concluding that the changes were effectively “hidden away” and that an ordinary taxpayer could not reasonably have been expected to be aware of them.
VAT Rule Change Triggered the Penalty
The issue arose after changes announced in the 2020 Spring Budget altered eligibility for the Agricultural Flat Rate Scheme. The scheme allows smaller farming businesses to avoid full VAT registration and instead apply a 4% flat rate to sales, reducing administrative burdens.
Under the revised rules, farms with taxable supplies exceeding £230,000 were excluded from the scheme and required to notify HMRC and register for VAT. Mr Julian missed the deadline to inform HMRC after his business crossed that threshold.
The error was discovered in April 2023, two years after the rule change took effect. Once alerted, the Julian Partnership notified HMRC and paid more than £500,000 in VAT owed within 12 months.
Tribunal Criticises Lack of Publicity
Despite settling the VAT liability, HMRC imposed a £43,438 penalty for failing to register on time. The tribunal examined whether ignorance of the law could constitute a “reasonable excuse” in this case.
The judge found that the change to the AFRS was a “very significant” one but had been “hidden away in a document aimed at specialists involved in tax policy.” There had been little publicity around the reform, and the Julians were described as farmers with no tax expertise.
As a result, the tribunal ruled it was “entirely reasonable” that an ordinary taxpayer would not have been aware of the change, and the penalty was overturned.
Family Farm Faced Major Financial Burden
The Julian Partnership grows flowers year-round on the small island of St Martin’s, selling them as gifts by post. The family also runs two holiday cottages and keeps a small herd of beef cattle.
Emma Beechey, of accountancy firm Moore Kingston Smith, said the £43,000 fine represented a significant burden for a small agricultural business. She argued HMRC had taken too narrow a view of what constitutes a reasonable excuse.
She said HMRC guidance typically focuses on unforeseen circumstances but failed in this case to recognise that the rule change was not easily accessible to the taxpayer or even to a generalist accountant.
HMRC Considering Next Steps
An HMRC spokesperson said the department noted the tribunal’s decision and was considering its next steps.
The case highlights ongoing tensions between taxpayers and HMRC over penalty enforcement and what qualifies as a reasonable excuse, particularly when legislative changes are not widely publicised.
