VSIM3100 - Official error case law: introduction

This guidance deals with interest matters in respect of prescribed accounting periods starting on or before 31 December 2022. Interest matters with effect from 01 January 2023 are dealt with under Finance Act 2009.

Please see Compliance Handbook page CH140000 onwards to find the new interest rules guidance.

There is no statutory definition of official error in VATA section 78, therefore the words take on there natural and every day meaning. HMRC have historically taken this to mean where a business has been financially disadvantaged by official action.

The law does not however make any provision to take into account errors on the part of both parties. In the case of Mr and Mrs P Bonanni - and - C&E Commissioners, LON/92/1485A (VTD 11823), the Tribunal commented that the fact that the error was not solely due to the Commissioners does not negate the fact that overpayments were also made due to official error.

Therefore the Tribunal decided that in principle statutory interest would be properly due on those overpayments. Nonetheless, statutory interest was found not to be due in this case for other reasons.

If HMRC make a decision which later turns out to be wrong because the taxpayer provided incorrect information, then we should contend that statutory interest is not due as the error was due solely to the taxpayer.

A decision that has further clarified what is meant by ‘error’ is CGI Pension Trust Ltd MAN/98/85Z (VTD 15926). The Tribunal concluded that two things must be proven. Firstly whether there had been an error, or errors by the Commissioners within the meaning of section 78(1) of the 1994 Act. If so secondly whether it was due to the Commissioners that one of the four events as set out in section 78(1) had happened to the taxpayer. The Tribunal decided that only if the answer to both questions is yes, at that point statutory interest would be due, subject to the requirements for the taxpayer to make a valid claim within the statutory time limits, see VSIM2300.

There will be circumstances when despite following all correct procedures, official error may still be made because the guidance is deficient or policy advice given in good faith is later found to be incorrect - for example: a binding court decision means HMRC’s view of the law is incorrect.

Legal opinion confirms when a Tribunal upholds an appeal against a decision of HMRC then there is an error within the meaning of section 78(1) VATA. This is because HMRC’s decision will have been based on the interpretation of the facts of the case or the law and if a Tribunal or Court finds otherwise then HMRC have made a mistake. However see VSIM7600 regarding interest following HMRC loss at tribunal

Admitting official error and paying statutory interest does not necessarily mean that any particular individual is at fault.

VATA s78(1)