From a VAT penalty perspective, ‘deliberate behaviour’ does not always involve a conscious decision to act incorrectly. The First-tier Tribunal’s decision in Kog v HMRC shows that turning a blind eye to a known risk can also amount to deliberate conduct and result in penalties.
Our VAT and indirect taxes team explain how ignoring VAT risks can be considered deliberate behaviour, sharing insights from the recent case of Kog v HMRC.
What counts as deliberate behaviour for VAT penalties?
Deliberate behaviour for penalty purposes does not require a conscious intention to get things wrong. A taxpayer cannot avoid a deliberate penalty simply by claiming ignorance where that ignorance is self-imposed.
Where a taxpayer is aware of a potential issue, particularly where professional advice has flagged a risk, failure to take reasonable steps to clarify the position can be treated as deliberate conduct. In short, ‘putting your head in the sand’ may be just as damaging as actively choosing the wrong treatment.
Case example – Kog v HMRC (2026)
The Kog v HMRC case concerned a company, controlled by the taxpayer, that acquired a commercial property. On acquisition, the company exercised the option to tax, enabling it to recover the associated input VAT.
However, despite the option to tax being in place, no VAT was charged on the rental income generated by the property. When the property was subsequently sold, no output VAT was accounted for on the disposal either.
HMRC later raised an assessment to recover the unpaid output tax on both the rents and the sale. HMRC also imposed a penalty on the basis that the VAT returns contained deliberate inaccuracies. That penalty was transferred personally to the taxpayer, on the grounds that they had deliberately caused the company to submit incorrect returns.
The taxpayer’s position on VAT return penalties
The taxpayer argued that they had not made a conscious or deliberate decision to omit output VAT. They maintained that the failures were not intentional and therefore should not attract a penalty for deliberate behaviour.
Initially, this argument found some support. The Tribunal accepted that the taxpayer had not expressly decided to ignore the VAT consequences of the option to tax or set out to submit inaccurate returns.
The concept of ‘blind eye’ knowledge
However, the Tribunal’s analysis did not end there. Instead, the judge examined whether the taxpayer’s conduct amounted to a deliberate ‘blind eye’ decision.
The evidence showed that the taxpayer was aware that there was an issue as to whether the property had been opted to tax. They had been advised by his agent that there was a possibility that VAT should be charged on the rents. Despite this, the taxpayer did not seek clarification from HMRC or take steps to confirm the correct VAT treatment.
The judge reviewed the existing case law on ‘blind eye’ knowledge: a concept which applies where a person suspects that a state of affairs may exist but deliberately chooses not to make further enquiries in order to avoid confirming that suspicion.
The Tribunal’s decision
The Tribunal concluded that the taxpayer’s conduct amounted to deliberate behaviour, and this can increase the penalty up to 70%. Although the taxpayer had not consciously decided to submit inaccurate VAT returns, they knew there was a real risk that the returns were wrong. By doing nothing to establish the correct position, they effectively turned a blind eye to that risk.
Careless penalties are a maximum of 30% and can even be mitigated down to 0% in some circumstances.
In those circumstances, the Tribunal found that the taxpayer knew the VAT returns contained inaccuracies and deliberately failed to correct them. As a result, the deliberate behaviour penalty was upheld.
Practical takeaways to avoid VAT return penalties
For taxpayers and advisers alike, the key lesson from the case of Kog v HMRC is the importance of addressing known uncertainties.
- Do not assume that claiming ignorance will protect you from VAT return penalties.
- If there is doubt over the correct VAT treatment, especially in areas such as options to tax, seek clarification from HMRC or a VAT specialist.
- If professional advice identifies a risk, make sure you act on it.
Failing to do so may not only result in an assessment for underpaid tax, but also in penalties for deliberate behaviour.
Act now to protect your business from VAT penalties
Ignoring VAT risks can be treated as deliberate and you could face penalties. Get in touch with our VAT and indirect tax experts for clarity on the risks that could affect your business.
